copyright 2007 prentice-hall. all rights reserved 1 flexible budgets and standard costs chapter 11

Copyright © 2007 Prentice-Hall. All rights reserved1

Flexible Budgets andStandard Costs

Chapter 11


Objective 1

Prepare a flexible budgetfor the income statement


Static BudgetIn Touch

Responsibility Accounting Performance Report (Amounts in thousands)

September 2009Manager – All handheld devicesBudget Actual Variance

Operating income:PDAs $ 75 $ 60 $(15)Cell Phones 474 519 45Total operating income $549 $579 $ 30


Flexible Budget – E11-17

Logiclik

Monthly Flexible Budget

Per UnitOutput Units (Mouse Pads)

40,000 50,000 70,000

Sales revenue $11.00

Variable expenses $ 5.00

Fixed expenses 200,000 200,000 250,000

Total expenses

Operating income

$440,000 $550,000 $770,000

200,000 250,000 350,000

400,000 450,000 600,000

$40,000 $100,000 $170,000


E11-18

$0

$200,000

$400,000

$600,000

$800,000

0 10 20 30 40 50 60 70 80

Units (in thousands)

Fixed

Variable


Objective 2

Use the flexible budget to show why actual results differ from the

static budget


Static Budget Variances

Sales Volume VarianceFlexible Budget Variance

Actual Results

Flexible Budgetbased on actual

number of outputs

Static Budgetbased on expectednumber of outputs

Static Budget Variance


Sales Volume VarianceStatic Budget(for the # units

expectedto be sold)

-Flexible Budget(for the # units

actually sold)


Flexible Budget Variance

Flexible Budget(for the # units

actually sold)- Actual Results


E11-20Manion Industries

Income Statement Performance Report (in thousands)Year 20X7

Act. Results at Act Prices

Flex Bud Variance

Flex Bud-Act # Units

Sales Volume

VarianceStatic

BudgetOutput unitsSales rev.Variable exp.Fixed exp.Total exp.Op. income

145140140$1,160$1,120$1,330

319308322400400420719708742

$441$412$588

$40 U$210 F5 U-0-

11 F14 U-0-20 U

11 F34 U$29 U$176 F


E11-20Manion Industries

Income Statement Performance Report (in thousands)Year 20X7

Act. Results at Act Prices

Flex Bud Variance

Flex Bud-Act # Units

Sales Volume

VarianceStatic

BudgetOp. income $441$412$588 $29 U$176 F

Static Budget Variance$147,000 F


Objective 3

Identify the benefitsof standard costs and learn how to

set standards


Standard Costs• Budget for a single unit• Price standards• Quantity standards


Price Standards

• Direct materials - Purchase price (after early-pay discount) + freight-in + receiving costs

• Direct labor – basic pay rates + payroll taxes + fringe benefits

• Manufacturing overhead – determine resources needed for support activities and determine appropriate allocation base


Quantity Standards

• Direct materials – product specifications allowing for spoilage

• Direct labor – time requirements to produce product as well as level of experience needed to do specific tasks

• Manufacturing overhead - determine resources needed for support activities


Benefits of Standard Costs

Helps managers• In budget preparation• Target levels of performance• Identify performance standards• Set sales prices • Decrease accounting costs


Variances

Efficiency VariancePrice Variance

Actual Price X

Actual Quantity

Standard PriceX

Actual Quantity

Standard PriceX

Standard Quantity

Total Cost Variance


Price Variance

• Measures how well the business keeps unit costs within standards

(Actual Price x Actual Quantity) – (Standard Price x Actual Quantity)

or(Actual Price – Standard Price) x Actual Quantity

(AP – SP) x AQ


Efficiency Variance

• Efficiency - measures how well the business uses its materials or human resources

(Standard Price x Actual Quantity) – (Standard Price x Standard Quantity)

or(Actual Quantity – Standard Quantity) x Standard Price

(AQ – SQ) x SP


Variances

Sales Volume VarianceFlexible Budget Variance

Actual Results

Flexible Budgetbased on actual

number of outputs

Static Budgetbased on expectednumber of outputs

Static Budget Variance

Efficiency Variance

Price Variance


Objective 4

Compute standard cost variancesfor direct materials and direct

labor


E11-22

Total Cost Variance for Direct Materials:Static budget

$1.10 x 7’ x 200,000 fenders $1,540,000Actual cost

$1.05 x 1,450,000 1,522,500$17,500 F


E11-22

Materials price variance: Actual Quantity = 1,450,000 feetActual Price = $1.05Standard Price = $1.10(Actual Price – Standard Price) x Actual Quantity($1.05 - $1.10) x 1,450,000 feet = $72,500 F


E11-22

Materials efficiency variance: Actual Quantity = 1,450,000Standard Quantity = 200,000 fenders x 7’ = 1,400,000Standard Price = $1.10(Actual Quantity–Standard Quantity) x Standard Price(1,450,000-1,400,000) x $1.10 = $55,000 U


E11-22

Total Cost Variance for Direct Labor:Static budget

$13 x .025 hrs x 200,000 fenders $65,000Actual cost

$14 x 4,500 63,000$2,000 F


E11-22

Labor price variance: Actual Quantity = 4,500 hoursActual Price = $14.00Standard Price = $13.00(Actual Price – Standard Price) x Actual Quantity($14 - $13) x 4,500 hours = $4,500 U


E11-22

Labor efficiency variance: Actual Quantity = 4,500 hrs.Standard Quantity = 200,000 fenders x .025

= 5,000 hrs.Standard Price = $13.00(Actual Quantity–Standard Quantity) x Standard Price(4,500 – 5,000) x $13 = $6,500 F


Objective 5

Analyze manufacturing overheadin a standard cost system


Total Overhead Variance

Manufacturing Overhead Variance

Actual Overhead Cost

StandardOverhead Cost


Allocating Overhead in a Standard Cost System

Predetermined overhead rate x Standard quantity of allocation base allowed for actual outputs


E11-25

Manufacturing overhead variance:Standard overhead costs:

33,000 gallons x $1.50 $49,500Actual overhead costs:

$16,200 + $32,500 48,700$800 F


Production VolumeVariance

Overhead FlexibleBudget Variance

Total Overhead Variance

Manufacturing Overhead Variance

Actual overhead cost

Standardoverhead cost

Flexible budgetoverhead for actual

outputs


Manufacturing Overhead Variances

• Overhead flexible budget variance – how well managers controlled overhead costs

• Production volume variance - when actual production differs from expected production


E11-25Overhead flexible budget variance:Actual overhead cost $48,700Flexible budget overhead ($.50 x 33,000) + $30,000 46,500Total overhead flexible budget variance $2,200 U


E11-23Production volume variance:Flexible budget overhead $46,500Standard overhead allocated to

actual production (33,000 x $1.50) 49,500Total production volume variance $3,000 F


Objective 6

Record transactions at standard cost and prepare a standard cost

income statement


Standard Cost Accounting System

1. Each variance has GL account• Debit balance – unfavorable• Credit balance – favorable


Standard Cost Accounting Systems

• Each variance has GL account• Debit balance – unfavorable• Credit balance – favorable

• Standard costs (not actual costs) are used to record manufacturing costs put into inventory accounts

• Variance accounts are closed to cost of goods sold at end of period


E11-23

GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Materials inventory (1,450,000 x $1.10) 1,595,000

Direct materials pricevariance 72,500

Accounts payable (1,450,000 x $1.05) 1,522,500


E11-23


Work in process inventory (1,400,000 x $1.10) 1,540,000

Direct materials efficiencyvariance 55,000

Materials inventory (1,450,000 x $1.10) 1,595,000


E11-23


Manufacturing wages(4,500 x $13) 58,500

Direct labor price variance 4,500

Wages payable(4,500 x $14) 63,000


E11-23


Work in process inventory (5,000 x $13) 65,000

Direct labor efficiencyvariance 6,500

Manufacturing Wages (4,500 x $13) 58,500


E11-26Western Outfitters, Inc.

Standard Cost Income StatementFor the Month Ended April 30

Sales revenue $560,000Cost of goods sold at standard cost 342,000Manufacturing cost variances: Direct materials price variance $(2,000) Direct materials efficiency variance (6,000) Direct labor price variance 4,000 Direct labor efficiency variance (2,000) Overhead flexible budget variance 3,500 Production volume variance (8,000)Total manufacturing variances (10,500)Cost of goods sold at actual cost 331,500Gross profit $228,500


End of Chapter 11

copyright 2007 prentice-hall. all rights reserved 1 flexible budgets and standard costs chapter 11

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