Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All Chapter 21 Flexible Budgets and Standard Costing Conceptual Learning Objectives C1: Define standard costs and explain how standard cost information is useful for management by exception . 21-3 Analytical Learning Objectives A1: Analyze changes in sales from expected amounts. 21-4 Procedural Learning Objectives
P1: Prepare a flexible budget and interpret a flexible budget performance report. P2: Compute materials and labor variances. P3: Compute overhead variances. P4A: Prepare journal entries for standard costs and account for price and quantity variances. 21-5 Budgetary Control and Reporting P1 Develop the budget from planned objectives. Revise objectives and prepare a new budget. Management uses budgets to monitor and control operations.
Compare actual with budget and analyze any differences. Take corrective and strategic actions. 21-6 A1 Fixed Budget Performance Report Optel Fixed Budget Performance Report For the Month Ended January 31, 2011 Sales: In units In dollars Fixed Budget 10,000 $ 100,000 Actual Results 12,000
$ 125,000 Cost of goods sold Selling expenses Gen. & admin. expenses Total expenses Income from operations $ 49,000 13,000 26,000 $ 88,000 $ 12,000 $ 58,100 15,100 26,400 $ 99,600 $ 25,400 Variances $ 25,000 F $ 9,100 2,100 400 $ 11,600 $ 13,400
U U U U F 21-7 A1 Fixed Budget Performance Report Optel If unit sales are higher, should we expect costs to be higher? Fixed Budget Performance Report How much ofFor thethe higher costs are because of higher unit sales? Month Ended January 31, 2005 Sales: In units In dollars Fixed Budget 10,000
$ 100,000 Actual Results 12,000 $ 125,000 Cost of goods sold Selling expenses Gen. & admin. expenses Total expenses Income from operations $ 49,000 13,000 26,000 $ 88,000 $ 12,000 $ 58,100 15,100 26,400 $ 99,600 $ 25,400 Variances $ 25,000 F $
9,100 2,100 400 $ 11,600 $ 13,400 U U U U F 21-8 P1 Purpose of Flexible Budgets Show revenues and expenses that should have occurred at the actual level of activity. May be prepared for any activity level in the relevant range. Reveal variances due to good cost control or lack of cost control. Improve performance evaluation. 21-9 P1
Preparing Flexible Budgets To a budget for different activity levels, we must know how costs behave with changes in activity levels. Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. r Va le b ia Fixed 21-10 P1
Preparing Flexible Budgets Optel Flexible Budgets For the Month Ended January 31, 2011 Sales: Total variable costs Contribution margin Total fixed costs Income from operations Variable Amount per Unit $ 10.00 4.80 $ 5.20 Total Fixed Cost $ 40,000 Budget for 10,000 Units
$ 100,000 48,000 $ 52,000 40,000 $ 12,000 Budget for 12,000 Units $ 120,000 57,600 $ 62,400 40,000 $ 22,400 Budget for 14,000 Units $ 140,000 67,200 $ 72,800 40,000 $ 32,800 Variable costs are expressed as a constant amount per unit. 21-11
P1 Preparing Flexible Budgets Optel Flexible Budgets For the Month Ended January 31, 2011 Sales: Total variable costs Contribution margin Total fixed costs Income from operations Variable Amount per Unit $ 10.00 4.80 $ 5.20 Total Fixed Cost $ 40,000 Budget for
10,000 Units $ 100,000 48,000 $ 52,000 40,000 $ 12,000 Budget for 12,000 Units $ 120,000 57,600 $ 62,400 40,000 $ 22,400 Budget for 14,000 Units $ 140,000 67,200 $ 72,800 40,000 $ 32,800 Total variable cost = $4.80 per unit budget level in units
21-12 P1 Preparing Flexible Budgets Optel Flexible Budgets For the Month Ended January 31, 2011 Sales: Total variable costs Contribution margin Total fixed costs Income from operations Variable Amount per Unit $ 10.00 4.80 $ 5.20 Total Fixed Cost $ 40,000 Budget
for 10,000 Units $ 100,000 48,000 $ 52,000 40,000 $ 12,000 Budget for 12,000 Units $ 120,000 57,600 $ 62,400 40,000 $ 22,400 Budget for 14,000 Units $ 140,000 67,200 $ 72,800 40,000 $ 32,800
Fixed costs are expressed as a total amount that does not change within the relevant range of activity. 21-13 P1 Flexible Budget Performance Report Optel Flexible Budget Performance Report For the Month Ended January 31, 2011 Sales (12,000 units) Total variable costs Contribution margin Total fixed costs Income from operations Variable Amount per Unit $ 10.00 4.80 $ 5.20 Total Fixed Cost
$ 40,000 Budget for 12,000 Units $ 120,000 57,600 $ 62,400 40,000 $ 22,400 Actual for 12,000 Units $ 125,000 59,400 $ 65,600 40,200 $ 25,400 Variances $ 5,000 F 1,800 U $ 3,200 F 200 U $ 3,000 F
Favorable sales variance indicates that the average selling price was greater than $10.00. 21-14 P1 Flexible Budget Performance Report Optel Flexible Budget Performance Report For the Month Ended January 31, 2011 Sales (12,000 units) Total variable costs Contribution margin Total fixed costs Income from operations Variable Amount per Unit $ 10.00 4.80 $ 5.20 Total Fixed Cost
$ 40,000 Budget for 12,000 Units $ 120,000 57,600 $ 62,400 40,000 $ 22,400 Actual for 12,000 Units $ 125,000 59,400 $ 65,600 40,200 $ 25,400 Variances $ 5,000 F 1,800 U $ 3,200 F 200 U $ 3,000 F
Unfavorable cost variances indicate costs that are greater than expected. 21-15 P1 Flexible Budget Performance Report Optel Flexible Budget Performance Report For the Month Ended January 31, 2011 Sales (12,000 units) Total variable costs Contribution margin Total fixed costs Income from operations Variable Amount per Unit $ 10.00 4.80 $ 5.20 Total Fixed Cost
$ 40,000 Budget for 12,000 Units $ 120,000 57,600 $ 62,400 40,000 $ 22,400 Actual for 12,000 Units $ 125,000 59,400 $ 65,600 40,200 $ 25,400 Variances $ 5,000 F 1,800 U $ 3,200 F 200 U $ 3,000 F
Favorable variances because favorable sales variance overcomes unfavorable cost variances. 21-16 C1 Standard Costs Based on carefully predetermined amounts. Standard Costs are Used for planning labor, material and overhead requirements. The expected level of performance. Benchmarks for measuring performance. 21-17 C1 Setting Standard Costs Should we use practical standards or ideal standards?
Engineer Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Production Manager Managerial Accountant 21-18 C1 Setting Direct Material Standards Price Standards Quantity Standards Use competitive bids for the quality and quantity desired. Use product
design specifications. 21-19 C1 Setting Direct Material Standards The standard material cost for one unit of product is: standard price for one unit of material standard quantity of material required for one unit of product 21-20 C1 Setting Direct Labor Standards Rate Standards Time Standards
Use wage surveys and labor contracts. Use time and motion studies for each labor operation. 21-21 C1 Setting Direct Labor Standards The standard labor cost for one unit of product is: standard wage rate for one hour standard number of labor hours for one unit of product 21-22 C1
Setting Variable Overhead Standards Rate Standards Activity Standards The rate is the variable portion of the predetermined overhead rate. The activity is the cost driver used to calculate the predetermined overhead. 21-23 C1 Setting Variable Overhead Standards The standard variable overhead cost for one unit of product is: standard variable overhead rate for one unit of
activity standard number of activity units for one unit of product 21-24 C1 Standard Cost Card A standard cost card might look like this: Cost factor Direct materials Direct labor Variable mfg. overhead Total standard unit cost Standard Quantity or Hours 1 kg. 2 hours 2 hours
Standard Price or Rate $ $ $ Standard Cost 25 per kg. $ 20 per hour 10 per hour $ 25.00 40.00 20.00 85.00 21-25 P2 Variances Amount
A standard cost variance is the amount by which an actual cost differs from the standard cost. Standard cost Direct Material Direct Labor Manufacturing Overhead Type of Product Cost 21-26 P2 Variance Analysis Identify questions Receive explanations Conduct next periods
operations Analyze variances Begin Take corrective actions Prepare standard cost performance report 21-27 P2 Computing Variances Standard Cost Variances Price Variance Quantity Variance The difference between the actual price and the standard price
The difference between the actual quantity and the standard quantity 21-28 P2 Computing Variances Actual Quantity Actual Price Actual Quantity Standard Price Price Variance Standard Quantity Standard Price Quantity Variance Standard price is the amount that should have been paid for the resources acquired. 21-29
P2 Computing Variances Actual Quantity Actual Price Actual Quantity Standard Price Price Variance Standard Quantity Standard Price Quantity Variance Standard quantity is the quantity that should have been used for the actual good output. 21-30 P2 Computing Variances Actual Quantity
Actual Price Actual Quantity Standard Price Standard Quantity Standard Price Price Variance Quantity Variance AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity AP = Actual Price SP = Standard Price SQ = Standard Quantity 21-31 P2 Labor Variances Actual Hours
Actual Rate Actual Hours Standard Rate Rate Variance Materials price- SR) variance AH(AR Labor rate variance AH = Actual Hours Variable overhead AR = Actual Rate spending variance Standard Hours Standard Rate Efficiency Variance
Materials quantity variance SR(AH - SH) Labor efficiency variance SRVariable = Standard Rate overhead SHefficiency = Standard Hours variance 21-32 P2 Labor Variances Poorly trained workers Poor quality materials Unfavorable Efficiency
Variance Poor supervision of workers Poorly maintained equipment 21-33 Overhead Standards and Variances P3 Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Assigned Overhead = POHR Standard Activity POHR = Estimated total overhead costs Estimated activity 21-34 P3
Setting Overhead Standards Contains a fixed overhead rate which declines as activity level increases. Contains a variable unit rate which stays constant at all levels of activity. Overhead Rate Function of activity level chosen to determine rate. 21-35 P3 Computing Variable Overhead Variances Actual Variable Overhead Flexible Budget for Variable Overhead at
Applied Variable Overhead at Actual Hours AH SVR Standard Hours SH SVR Incurred AH AVR Spending Variance AH AVR SVR SH = = = = Efficiency
Variance Actual Hours of Activity Actual Variable Overhead Rate Standard Variable Overhead Rate Standard Hours Allowed 21-36 P3 Computing Fixed Overhead Variances Actual Fixed Overhead Fixed Overhead Incurred Budget Spending Variance Fixed Overhead Applied SH SFR
Volume Variance SFR = Standard Fixed Overhead Rate SH = Standard Hours Allowed 21-37 P3 Overhead Variance Analysis Total Overhead Variance Variable Overhead Spending Variance Efficiency Variance Controllable Variance Fixed Overhead
Spending Variance Volume Variance 21-38 P3 Variable Overhead Variances Spending Variance Results from paying more or less than expected for overhead items and from excessive usage of overhead items. Efficiency Variance A function of the selected cost driver. It does not reflect overhead control. 21-39 P3
Fixed Overhead Variances Spending Variance Results from paying more or less than expected for fixed overhead items. Volume Variance Results from the inability to operate at the activity planned for the period. Has no significance for cost control. 21-40 C1 Standard Costs for Control Amount Managers focus on quantities and costs that differ from standards, a practice known as management by exception. Standard cost Direct Material
Direct Labor Manufacturing Overhead Type of Product Cost 21-41 End of Chapter 21 21-42
