Flexible Budgets and Standard Costs Chapter 22 Learning
Flexible Budgets and Standard Costs Chapter 22
Learning Objective 1 Prepare a flexible budget for the income statement
Static vs. Flexible Budgets Static Budget Prepared for only one level of sales volume Flexible Budget Prepared for several different volume levels within a relevant range Separates fixed and variable costs Variance = difference between actual and budget Favorable – actual amount increases income Unfavorable – actual amount decreases income Copyright (c) 2009 Prentice Hall. All rights reserved. 3
Learning Objective 2 Prepare an income statement performance report
Static Budget Variances Actual Results Flexible Budget based on actual number of outputs Static Budget based on expected number of outputs Flexible Budget Variance Sales Volume Variance Static Budget Variance Copyright (c) 2009 Prentice Hall. All rights reserved. 5
Budget Variances Sales Volume Variance Master Budget (for the expected number of units to be sold) Flexible Budget (for the number of units actually sold) Flexible Budget Variance Flexible Budget (for the number of units actually sold) Actual results (for the actual number of units to be sold) Copyright (c) 2009 Prentice Hall. All rights reserved. 6
Exercise 22 -16 Copyright (c) 2009 Prentice Hall. All rights reserved. 7
Exercise 22 -16: $2, 000 income lower than Expected, why? White Pro Company Income Statement Performance Report Year Ended July 31, 2011 Actual Results at Actual Prices Output units Sales revenue 41, 000 $215, 000 Flexible Budget Variance -0$ Flexible Budget for Actual Number of Output Units 41, 000 0 $215, 000 Sales Volume Variance Static (Master) Budget 7, 000 F 34, 000 19, 000 F $196, 000 Variable costs Fixed costs Total costs Operating income 85, 000 107, 000 (192, 000) $ 23, 000 588 U 84, 412 6, 000 U 101, 000 (6, 588) U (185, 412) $6, 588 U $ 29, 588 14, 412 U 0 14, 412 U 70, 000 101, 000 (171, 000 ) $4, 588 F $ 25, 000 Copyright (c) 2009 Prentice Hall. All rights reserved. 8
EXERCISE 22 -16: COMPUTATIO N • SALES REVENUE: • STATIC: $5. 76 X 34, 000=$196, 000; • FLEX: $5. 76 X 41, 000=$236, 160; • ACTUAL: $215, 000 (Ave. $5. 24 each) VARIABLE COSTS: • STATIC: $2. 059 X 34, 000=$70, 000; • FLEX: $2. 059 X 41, 000=$84, 412 • ACTUAL: $85, 000 (Ave. $2. 07 each) Copyright (c) 2009 Prentice Hall. All rights reserved. 9
Budget: Unit Selling Price=$7. 50, Variable Cost=$2. 60, Fixed Cost=$44, 000, 15, 000 units ctual: Unit Selling Price=$9. 00, Variable Cost=$2. 70, Fixed Cost=$46, 000, 14, 100 units Actual Results at Actual Prices Output units Sales revenue 14, 100 $126, 900 a Flexible Budget Variance -0$21, 150 F Flexible Budget for Actual Number of Output Units 14, 100 $6, 750 U 2, 340 F 38, 070 1, 410 U 36, 660 e Fixed expenses 46, 000 2, 000 U 44, 000 Total expenses (84, 070) (3, 410) U (80, 660) $ 42, 830 $17, 740 F 900 U $105, 750 b Variable expenses Operating income Sales Volume Variance $ 25, 090 0 Static (Master) Budget 15, 000 $112, 500 c 39, 000 f 44, 000 2, 340 F 83, 000 $4, 410 U $29, 500 Copyright (c) 2009 Prentice Hall. All rights reserved. 10
Learning Objective 3 Identify the benefits of standard costs and learn how to set standards
Standard Costs Budget for a single unit Each unit has standards for: Quantity Price Copyright (c) 2009 Prentice Hall. All rights reserved. 12
Price Standards Direct materials • Consider early-pay discounts, freight-in, and receiving costs • Managers look for ways to cut costs Direct labor • Consider pay rates, payroll taxes, and fringe benefits • Accountants work with human resource managers Manufacturing overhead • Accountants work with production managers • Appropriate allocation base chosen Copyright (c) 2009 Prentice Hall. All rights reserved. 13
Quantity Standards Direct materials • Consider product specifications, spoilage Direct labor • Consider time requirements • Use of time-and-motion studies and benchmarking Manufacturing overhead • Based on overhead application rate Copyright (c) 2009 Prentice Hall. All rights reserved. 14
Summary of Standard Setting Issues Price Standard Direct Materials Quantity Standard Responsibility: Production managers & engineers Factors: Purchase price, Factors: Product discounts, delivery, credit policy specifications, spoilage, production scheduling Direct Labor Responsibility: Human resource Responsibility: Production managers & engineers Factors: Wage rate, payroll taxes, fringe benefits Manufacturing Overhead Factors: Time requirements Responsibility: Production managers Factors: Nature and amount of resources needed for support activities Copyright (c) 2009 Prentice Hall. All rights reserved. 15
Benefits of Standard Costs Helps managers: In budget preparation Target levels of performance Identify performance standards Set sales prices Decrease accounting costs Copyright (c) 2009 Prentice Hall. All rights reserved. 16
Variances Actual Price X Actual Quantity Standard Price X Actual Quantity Price Variance Standard Price X Standard Quantity Efficiency Variance Total Cost Variance Copyright (c) 2009 Prentice Hall. All rights reserved. 17
Price Variance Measures how well the business keeps unit costs within standards (Actual Price x Actual Quantity) (Standard Price x Actual Quantity) OR Actual Quantity (Actual Price – Standard Price) (AP – SP) x AQ Copyright (c) 2009 Prentice Hall. All rights reserved. 18
Efficiency (Quantity) Variance Measures how well the business keeps unit costs within standards (Standard Price x Actual Quantity) (Standard Price x Standard Quantity) OR Standard Price (Actual Quantity – Standard Quantity) (AQ – SQ) x SP Copyright (c) 2009 Prentice Hall. All rights reserved. 19
Variances Actual Results Price Variance Flexible Budget based on actual number of outputs Static Budget based on expected number of outputs Efficiency Variance Flexible Budget Variance Sales Volume Variance Static Budget Variance Copyright (c) 2009 Prentice Hall. All rights reserved. 20
Review Questions? Copyright (c) 2009 Prentice Hall. All rights reserved. 21
1. A flexible budget: A. B. is prepared for different activity levels. separates variable costs from fixed costs. C. shows variances as favorable or unfavorable. D. is all of the above. Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 22
1. A flexible budget: A. B. is prepared for different activity levels. separates variable costs from fixed costs. C. shows variances as favorable or unfavorable. D. is all of the above. Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 23
2. If the flexible budget sales amount is greater than the amount on the master (static) budget, the result is a(n): A. B. C. D. favorable sales volume variance. unfavorable sales volume variance. favorable flexible budget variance. unfavorable flexible budget variance. Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 24
2. If the flexible budget sales amount is greater than the amount on the master (static) budget, the result is a(n): A. B. C. D. favorable sales volume variance. unfavorable sales volume variance. favorable flexible budget variance. unfavorable flexible budget variance. Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 25
3. If a company was trying to improve its labor quantity variance, it would: A. B. C. D. consider pay rates. eliminate fringe benefits. use time-and-motion studies. do all of the above. Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 26
3. If a company was trying to improve its labor quantity variance, it would: A. B. C. D. consider pay rates. eliminate fringe benefits. use time-and-motion studies. do all of the above. Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 27
4. Over which variance do production managers have the least control? A. B. C. D. Direct material quantity variance Direct materials price variance Direct labor quantity variance Direct labor price variance Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 28
4. Over which variance do production managers have the least control? A. B. C. D. Direct material quantity variance Direct materials price variance Direct labor quantity variance Direct labor price variance Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 29
Learning Objective 4 Compute standard cost variances for direct materials and direct labor
Computing Variances Gather necessary data: ◦ ◦ Identify fixed and variable costs Compare actual results with flexible budget Prepare flexible budget based on standard costs Compute actual quantities and prices of materials and labor Copyright (c) 2009 Prentice Hall. All rights reserved. 31
Exercise 22 -18 Direct materials price variance (Actual Price – Standard Price) ($1. 15 – $1. 10) Actual Quantity 2900 yards $145 U Copyright (c) 2009 Prentice Hall. All rights reserved. 32
Exercise 22 -18 (continued) Direct materials efficiency variance (Actual Quantity – Standard Quantity) Standard Price 2900 yards – (1000 units x 3 yards) $1. 10 $110 F Copyright (c) 2009 Prentice Hall. All rights reserved. 33
Exercise 22 -18 (continued) Actual price x Actual quantity Standard price x Standard quantity $1. 15 x 2900 = $3, 335 $1. 10 x 2900 = $3, 190 $1. 10 x 3000 = $3, 300 Price variance Efficiency variance $145 U $110 F Total materials variance $35 U Copyright (c) 2009 Prentice Hall. All rights reserved. 34
Exercise 22 -18 (continued) Direct labor price variance (Actual Price – Standard Price) ($9. 50 – $10. 00) Actual Hours 650 hours $325 F Copyright (c) 2009 Prentice Hall. All rights reserved. 35
Exercise 22 -18 (continued) Direct labor efficiency variance (Actual Hours – Standard Hours) 650 hours – (1, 000 units x 1 hour/unit) Standard Price $10. 00 $3, 500 F Copyright (c) 2009 Prentice Hall. All rights reserved. 36
Exercise 22 -18 (continued) Actual price x Actual hours Standard price x Actual hours $9. 50 x 650 = $6, 175 Standard price x Standard hours $10. 00 x 650 = $6, 500 $10. 00 x 1, 000 = $10, 000 Price variance Efficiency variance $325 F $3, 500 F Total labor variance $3, 825 F Copyright (c) 2009 Prentice Hall. All rights reserved. 37
Learning Objective 5 Analyze manufacturing overhead in a standard cost system
Total Overhead Variance Actual overhead cost minus Standard overhead allocated to production Copyright (c) 2009 Prentice Hall. All rights reserved. 39
Allocating Overhead in a Standard Cost System Overhead allocated to production Standard (predetermined) overhead rate Standard quantity of the allocation base allowed for actual output Copyright (c) 2009 Prentice Hall. All rights reserved. 40
Overhead Flexible Budget Variance Shows how well managers controlled overhead costs Actual overhead costs Flexible budget overhead for actual output Copyright (c) 2009 Prentice Hall. All rights reserved. 41
Overhead Production Volume Variance Occurs when actual production differs from expected production Flexible budget overhead for actual output Standard overhead allocated to actual production Copyright (c) 2009 Prentice Hall. All rights reserved. 42
Learning Objective 6 Record transactions at standard cost and prepare a standard cost income statement
Standard Cost Accounting Systems Materials inventory and Manufacturing wages are recorded at standard prices Unfavorable variances are recorded as debits; favorable variances are recorded as credits Work in process inventory is recorded at standard quantities and standard prices Copyright (c) 2009 Prentice Hall. All rights reserved. 44
Standard Cost Entries: Direct materials price variance GENERAL JOURNAL DATE DESCRIPTION Materials inventory REF DEBIT CREDIT (@ standard price) Direct materials price variance (if U-debit, if F-credit) Accounts payable (@ actual price) To record purchase of direct materials Copyright (c) 2009 Prentice Hall. All rights reserved. 45
Standard Cost Entries: Direct materials efficiency variance GENERAL JOURNAL DATE REF DESCRIPTION Work in process inventory DEBIT CREDIT (@ standard price & quantity) Direct materials efficiency variance (If U-debit, if F-credit) Materials inventory (@ standard price & actual quantity) To record use of direct materials Copyright (c) 2009 Prentice Hall. All rights reserved. 46
Standard Cost Entries: Direct labor price (rate) variance GENERAL JOURNAL DATE DESCRIPTION Manufacturing wages REF DEBIT CREDIT (@ standard rate) Direct labor price(rate) variance (If U-debit, if F-credit) Wages payable (@ actual rate) To record labor costs Copyright (c) 2009 Prentice Hall. All rights reserved. 47
Standard Cost Entries: Direct labor efficiency variance GENERAL JOURNAL DATE DESCRIPTION Work in process inventory REF DEBIT CREDIT (@ standard rate & hours) Direct labor efficiency variance (If U-debit, if F-credit Manufacturing wages (@ standard rate & actual hours) To allocate direct labor to production Copyright (c) 2009 Prentice Hall. All rights reserved. 48
Standard Cost Entries: Actual and allocated overhead GENERAL JOURNAL DATE DESCRIPTION REF DEBIT CREDIT Manufacturing overhead (actual costs incurred) Various accounts To record actual overhead costs incurred Work in process inventory (standard OH rate x standard allocation base ) Manufacturing overhead To allocate overhead costs to production Copyright (c) 2009 Prentice Hall. All rights reserved. 49
Standard Cost Entries: Completing production and COGS GENERAL JOURNAL DATE REF DESCRIPTION DEBIT CREDIT Finished goods inventory Work in process inventory To record completion of goods at standard cost Cost of goods sold Finished goods inventory To record the cost of goods sold at standard cost Copyright (c) 2009 Prentice Hall. All rights reserved. 50
Standard Cost Entries GENERAL JOURNAL DATE REF DESCRIPTION DEBIT CREDIT Overhead flexible budget variance Overhead production volume variance Manufacturing overhead To record overhead variances and close out the Manufacturing overhead account Copyright (c) 2009 Prentice Hall. All rights reserved. 51
Copyright (c) 2009 Prentice Hall. All rights reserved. 52
Review Questions? Overhead Variance Standard Cost Price Variance
9. Which overhead variance shows how well managers controlled overhead costs? A. B. C. D. Total overhead variance Overhead flexible budget variance Overhead production volume variance Overhead price variance Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 54
9. Which overhead variance shows how well managers controlled overhead costs? A. B. C. D. Total overhead variance Overhead flexible budget variance Overhead production volume variance Overhead price variance Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 55
10. When a company uses a standard cost accounting system, for which amount is the Materials inventory account debited when purchases are made? A. B. C. D. Standard quantity x standard price Actual quantity x actual price Standard quantity x actual price Actual quantity x standard price Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 56
10. When a company uses a standard cost accounting system, for which amount is the Materials inventory account debited when purchases are made? A. B. C. D. Standard quantity x standard price Actual quantity x actual price Standard quantity x actual price Actual quantity x standard price Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 57
11. In a standard costing income, how would an unfavorable labor price variance affect Cost of goods sold? A. B. C. Increase Decrease No effect Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 58
11. In a standard costing income, how would an unfavorable labor price variance affect Cost of goods sold? A. B. C. Increase Decrease No effect Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 59
Use the following data to answer the next questions: ◦ During the current month, a company produces 500 widgets. ◦ The standard costs are as follows: 2 pounds of direct material at $6 per pound 3 hours of direct labor at $15 per hour ◦ Actual costs incurred: 1060 pounds of direct material at a total cost of $6, 095 1480 hours of labor at a total cost of $22, 570 Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 60
5. Compute the direct materials price variance. Actual Quantity (Actual Price – Standard Price) Actual price = $6, 095/1060 lbs ($5. 75 – $6. 00) $5. 75 1060 lbs $265 F Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 61
6. Compute the direct materials quantity variance. Standard Price (Actual Quantity – Standard Quantity) Standard quantity = 500 units x 2 lbs 1000 lbs. $6 1060 lbs. – 1000 lbs $360 U Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 62
7. Compute the direct labor price variance. (Actual Price – Standard Price) Actual price = $22, 570 /1480 ($15. 25 – $15. 00) Actual Hours $15. 25 1480 $370 U Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 63
8. Compute the direct labor quantity variance. Standard Price (Actual Hours – Standard Hours) Standard hours = 500 units x 3 lbs 1485 hrs – 1500 hrs 1500 hours $15 $225 F Co pyr igh t (c) 20 09 Pr ent ice Ha ll. All rig hts res erv ed. 64
End of Chapter 22
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