Transcript Flexible Budgets and Standard Costs

Chapter 23
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Prepare a flexible budget for the income
statement
Prepare an income statement performance
report
Identify the benefits of standard costs and
learn how to set standards
Compute standard cost variances for direct
materials and direct labor
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Analyze manufacturing overhead in a
standard cost system
Record transactions at standard cost and
prepare a standard cost income statement
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Budget variance—the difference between an actual
amount and a budgeted figure
Managers use variances to operate a business
Important to know why actual amounts differ from the
budget
Enables managers to identify problems and decide upon
actions to take
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Prepare a flexible budget for the income statement
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Static budget
Prepared for one level of sales volume
Does not change after developed
Variances classification
Favorable (F) if an actual amount increases
operating income
Unfavorable (U) if an actual amount decreases
operating income
Flexible budget
Prepared for several different volume levels within a
relevant range
Separates fixed and variable costs
Variable costs put the “flex” in the flexible budget
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Need to know:
Selling price per unit
Variable cost per unit
Total fixed costs
Different volume levels within the relevant range
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Consider the following definitions. Give the cost term to the correct
definition—Flexible Budget, Flexible Budget Variance, Sales
Volume Variance, Static Budget, and Variance
1. A summarized budget for several levels of volume that separates
variable costs from fixed costs.
Flexible Budget
2. The budget prepared for only one level of sales volume.
Static Budget
3. The difference between an actual amount and the budget.
Variance
4. The difference arising because the company actually earned more
or less revenue, or incurred more or less cost, than expected for
the actual level of output.
Flexible Budget Variance
5. The difference arising only because the number of units actually
sold differs from the static budget units.
Sales Volume Variance
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Prepare an income statement performance report
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Managers need to know why variance occurred
To pinpoint problems
To take corrective action
Managers divide the static budget variance into
two broad categories
Flexible budget variance
Occurs because sales price per unit, variable cost per unit,
and/or fixed cost was different than planned
Sales volume variance
Arises because actual number of units sold differs from
the amount in the static budget
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Computations
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Moje, Inc., manufactures travel locks. The budgeted selling
price is $19 per lock, the variable cost is $8 per lock, and
budgeted fixed costs are $15,000.
1. Prepare a flexible budget for output levels of 4,000 locks
and 7,000 locks for the month ended April 30, 2012.
Sales revenue
Variable expenses
Moje, Inc.
Flexible Budget
Month Ended April 30, 2012
Flexible Budget
Output Units (Locks)
per Output Unit
4,000
7,000
$19
$76,000
$133,000
32,000
56,000
Contribution margin
44,000
77,000
Fixed expenses
15,000
15,000
$ 29,000
$62,000
Operating income (loss)
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$8
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Identify the benefits of standard costs and learn
how to set standards
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Budget for a single unit
Each unit has standards for price and quantity
Inputs:
Direct materials
Price – per unit cost of materials in each product
Quantity – amount used to make each product
Direct Labor
Price – wage rate for employees involved in
making the product
Quantity – time used to make each product
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Price Standards
Direct materials
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•
•
•
Base purchase cost of each unit of inventory
Consider early-pay discounts, freight-in, receiving costs
Managers look for ways to cut costs
Accountants work with managers to set price standard
Direct labor
• Consider pay rates, payroll taxes, and fringe benefits
• Accountants work with human resources for labor rates
Manufacturing overhead
• Identify appropriate allocation base
• Accountants work with production managers
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Direct materials
• Analyze every input in the production process
• Consider product specifications, spoilage, scheduling
Direct labor
• Consider time requirements for production, experience and
learning curve
• Use of time-and-motion studies and benchmarking
Manufacturing overhead
• Appropriate allocation base chosen
• Accountants work with production managers
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Determine cost standards for materials, labor, and overhead
Direct materials price standard for vinyl:
Purchase price, net of discounts
Delivery, receiving, and inspection
Total standard cost per square foot of vinyl
$1.90 per square foot
0.10 per square foot
$2.00 per square foot
Direct labor (DL) price (or rate) standard:
Hourly wage
$ 8.00 per direct labor hour
Payroll taxes and fringe benefits
2.50 per direct labor hour
Total standard cost per direct labor hour $10.50 per direct labor hour
Variable overhead price (or rate) standard
Estimated variable overhead cost
$6,400
=
Estimated quantity of allocation base
3,200 DL hours
= $2.00 per DL hour
Fixed overhead price (or rate) standard:
Estimated fixed overhead cost
$9,600
=
Estimated quantity of allocation base
3,200 DL hours
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= $3.00 per DL hour
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Helps managers:
Prepare the master budget
Set target levels of performance (static budget)
Identify performance standards (standard quantities
and standard costs)
Set sales prices of products and services
Decrease accounting costs
Requires upfront cost to develop standards:
Save accounting costs in the future
Avoids LIFO, FIFO and average cost computations
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Once established, use the standard cost to assign costs to
production
Once a year, compare actual production costs to standard
costs to locate variances
Variance Relationships
How well material and labor
prices are kept within standards
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How well a company uses its
materials or human resources
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Measures how well the business keeps unit
costs within standards
Difference in price of an input, multiplied by
the actual quantity used.
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Measures how well the business uses its
materials or human resources
It is the difference in quantities multiplied by
the standard price per unit
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The Relationships Among Price, Efficiency, Flexible Budget,
Sales Volume, and Static Budget Variances
This table illustrates two points:
First, the price and efficiency variances add up to the flexible
budget variance
Second, static budgets play no role in the price and
efficiency variances
The static budget is used to compute the sales volume variance
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4
Compute standard cost variances for direct
materials and direct labor
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Main concern: The $4,000 unfavorable flexible budget
variance
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Identify fixed and variable costs
Recall standard cost (computed earlier)
Materials - $2.00 per square foot of vinyl
Labor - $10.50 per direct labor hour
Overhead
Variable overhead price (or rate) standard is $2.00 per
direct labor hour
Fixed overhead price (or rate) standard is $3.00 per direct
labor hour
Identify the cost of one unit of production
Materials = 1 square foot per DVD = $2.00
Labor = .40 hours per DVD = $4.20
Variable Overhead = .40 hours per DVD = $0.80
Actual Sales Results = 10,000
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To compute variances, use the cost computed for
the flexible budget and actual results
Follow the direct materials variance of $2,800
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Two types of direct materials variances:
Direct materials price variance
Direct materials efficiency variance
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To compute variances, use the cost computed for
the flexible budget and actual results
Follow the direct labor variance of $ 200
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Two types of direct labor variances:
Direct labor price (rate) variance
Direct labor efficiency variance
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Johnson, Inc., is a manufacturer of lead crystal glasses. The standard
materials quantity is 0.8 pound per glass at a price of $0.30 per
pound. The actual results for the production of 6,900 glasses was 1.1
pounds per glass, at a price of $0.40 per pound.
1. Calculate the materials price variance and the materials
efficiency variance.
Materials Price Variance = (AP – SP) x AQ
= ($0.30 per pound – $0.40 per pound) x 6,900 glasses x 1.1 lb
= (– $0.10 per pound) x 7,590 pounds
= – $759 unfavorable
Direct Materials Efficiency Variance = (AQ – SQ) x SP
= (7,590 – 5,520) x $0.30 per pound
= (2,070) x $0.30 per pound
= $621 unfavorable
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Johnson, Inc., manufactures lead crystal glasses. The standard direct
labor time is 0.3 hour per glass, at a price of $13 per hour. The
actual results for the production of 6,900 glasses were 0.2 hour per
glass, at a price of $10 per hour.
1. Calculate the labor price variance and the labor efficiency
variance.
Direct Labor Price Variance = (AP – SP) x AH
= ($10.00 – $13.00) x 1,380 hours
= ($3.00) x 1,380 hours
= $4,140 favorable
Direct Labor Efficiency Variance = (AH – SH) x SP
= (1,380 hours – 2,070 hours) x $13.00 per hour
= (690 hours) x $13.00 per hour
= $8,970 favorable
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Analyze manufacturing overhead in a standard
cost system
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Total overhead variance—the difference between actual overhead
cost and standard overhead allocated to production
Allocating Overhead in a Standard Cost System
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To compute variances, use the cost computed for the
flexible budget and actual results
Follow the variable overhead variance of $1,000
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Two types of variable overhead variances:
Variable overhead spending (price) variance
Variable overhead efficiency variance
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To compute variances, use the cost computed for
the flexible budget and actual results
Follow the fixed overhead variance of $2,700
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Two types of variable overhead variances
Fixed overhead spending variance
Fixed overhead volume variance
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Refer to the data from Johnson, Inc., in S23-6 and S23-7. The
following information relates to the company’s overhead costs:
Static budget variable overhead $ 9,000
Static budget fixed overhead
$ 4,500
Static budget direct labor hours
1,800 hours
Static budget number of glasses 6,000
Johnson allocates manufacturing overhead to production based on
standard direct labor hours. Last month, Johnson reported the
following actual results: actual variable overhead, $10,200; actual
fixed overhead, $2,830.
1. Compute the standard variable overhead rate and the standard
fixed overhead rate.
Standard overhead rate = Budgeted overhead cost
Budgeted direct labor hours
Standard variable = $9,000 / 1,800 hours = $5 per DL hour
Standard fixed = $4,500 / 1,800 hours = $2.50 per DL hour
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Refer to the Johnson data in S23-6, S23-7, and S23-9.
Compute the variable and fixed overhead variances.
Use Exhibits 23-11 and 23-12 as guides.
VOH Spending Variance =(AP x AH) - (SP x AH)
= 10,200 – (1,380 x $5) = $3,300 (U)
VOH Efficiency Variance = (AH – SH) x SP
= (1,380 – 2,070) x $5 = $3,450 (F)
FOH Spending Variance = Actual fixed overhead – Budgeted fixed
overhead
= $2,830 – (1,800 x $2.50) = $1,670 (F)
FOH Volume Variance = Actual fixed overhead – Applied fixed
overhead
= (1,800 x $2.50) – (2,070 x $2.50)
= $675 (F)
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Record transactions at standard cost and
prepare a standard cost income statement
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Records variances from standards as soon as possible
Records direct materials price variances when materials
are purchased
Work in process inventory is debited at standard input
quantities and standard prices
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Manufacturing wages is debited at standard
prices for direct labor hours actually used
Work in process inventory is debited for the
standard cost per direct labor hour that should
have been used
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Record actual overhead cost for June
Record the overhead allocated to Work in
process inventory computed
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Record the transfer of the standard cost of the
DVDs completed from Work in process
inventory to Finished goods
Record the transfer of the cost of sales of the
10,000 DVDs sold at standard cost
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Closes the Manufacturing overhead account and
records the overhead variances
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The master budget is a static budget, which means it
is prepared for only one level of sales volume. A
variance is the difference between an actual amount
and a budgeted amount. A flexible budget summarizes
costs and revenues for several different volume levels
within a relevant range.
An income statement performance report is prepared
at the end of the period to measure actual results
against the flexible and static budgets. A static budget
variance occurs because actual activity differed from
what was expected in the static budget.
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The static budget variance is divided into two
variances: The flexible budget variance arises because
the company had different revenues and/or costs than
expected for the actual level of units sold. The sales
volume variance arises because the actual number of
units sold differed from the number of units on which
the static budget was based.
Most companies use standard costs to develop their
flexible budgets. Standard cost is a budget for a single
unit of materials, labor, and overhead. Price variances
measure the difference in actual and standard prices.
Efficiency variances measure the difference in actual
and standard quantities used.
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Standard cost variances for direct materials and direct
labor are each split between the price variance and
efficiency variance. The price variance measures the
difference between actual and standard price for direct
materials and labor used. The efficiency variance
measures the difference between actual and standard
usage for direct materials and labor based on standard
prices. In analyzing each variance, management must
consider the overall effect of each decision and how it
affected overall results for the production period.
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When companies utilize standard costs, journal entries
are made using standard costs, and variances are
recorded at the same time. The variances are then
shown on a standard costing income statement to
highlight variances to management for more efficient
decision making.
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