Flexible Budgets and Standard Costs Chapter 23 1

Learning Objectives 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 2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Learning Objectives Analyze manufacturing overhead in a standard cost system Record transactions at standard cost and prepare a standard cost income statement 3 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Budgets and Variances 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 4 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

1 Prepare a flexible budget for the income statement 5 Copyright © 2012 Pearson

Static vs. Flexible Budgets 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 6 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Create a Flexible Budget Need to know: Selling price per unit Variable cost per unit Total fixed costs Different volume levels within the relevant range 7 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

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. 2. The budget prepared for only one level of sales volume. 3. The difference between an actual amount and the budget. 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. 5. The difference arising only because the number of units actually sold differs from the static budget units. 8 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

2 Prepare an income statement performance report 9 Copyright © 2012 Pearson Education, Inc.

Using the Flexible Budget 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 Sales volume variance 10 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Static Budget Variances Computations 11 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice

Income Statement Performance Report 12 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice

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. Moje, Inc. Flexible Budget Month Ended April 30, 2012 Flexible Budget Output Units (Locks) per Output Unit 4, 000 7, 000 Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) 13 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

3 Identify the benefits of standard costs and learn how to set standards 14

Standard Costs Budget for a single unit Each unit has standards for price and

Price Standards Direct materials Direct labor Manufacturing overhead 16 Copyright © 2012 Pearson Education,

Quantity Standards Direct materials Direct labor Manufacturing overhead 17 Copyright © 2012 Pearson Education,

Application Computing Standards Determine cost standards for materials, labor, and overhead Direct materials price standard for vinyl: Purchase price, net of discounts $1. 90 per square foot Delivery, receiving, and inspection 0. 10 per square foot Total standard cost per square foot of vinyl $2. 00 per square foot Direct labor (DL) price (or rate) standard: Hourly wage Payroll taxes and fringe benefits Total standard cost per direct labor hour $ 8. 00 per direct labor hour 2. 50 per direct labor hour $10. 50 per direct labor hour Variable overhead price (or rate) standard: Fixed overhead price (or rate) standard: 18 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Standard Setting Issues 19 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Benefits of Standard Costs 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 20 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Variance Analysis 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 21 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Price Variance Measures how well the business keeps unit costs within standards Difference in price of an input, multiplied by the actual quantity used 22 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Efficiency (or Quantity) Variance Measures how well the business uses its materials or human resources It is the difference in quantities multiplied by the standard price per unit 23 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Variances The Relationships Among Price, Efficiency, Flexible Budget, Sales Volume, and Static Budget Variances

4 Compute standard cost variances for direct materials and direct labor 25 Copyright ©

Analyzing the Flexible Budget Variance Main concern: The $4, 000 unfavorable flexible budget variance

Data for Standard Costing Example Identify fixed and variable costs Recall standard cost (computed earlier) Overhead 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 27 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Computation of Flexible Budget and Actual Results 28 Copyright © 2012 Pearson Education, Inc.

Computing Variances: Materials To compute variances, use the cost computed for the flexible budget and actual results Follow the direct materials variance of $2, 800 29 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Direct Materials Variance Two types of direct materials variances: Direct materials price variance Direct materials efficiency variance 30 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Computing Variances: Labor To compute variances, use the cost computed for the flexible budget and actual results Follow the direct labor variance of $ 200 31 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Direct Labor Variances Two types of direct labor variances: Direct labor price (rate) variance

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. 33 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

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. 34 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

5 Analyze manufacturing overhead in a standard cost system 35 Copyright © 2012 Pearson

Manufacturing Overhead Variances Total overhead variance—the difference between actual overhead cost and standard overhead allocated to production 36 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Computing Variances: Variable To compute variances, use the cost computed for the Overhead flexible budget and actual results Follow the variable overhead variance of $1, 000 37 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Variable Overhead Variances Two types of variable overhead variances: Variable overhead spending (price) variance Variable overhead efficiency variance 38 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Computing Variances: Fixed Overhead To compute variances, use the cost computed for the flexible budget and actual results Follow the fixed overhead variance of $2, 700 39 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Fixed Overhead Variances Two types of variable overhead variances Fixed overhead spending variance Fixed overhead volume variance 40 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Refer to the data from Johnson, Inc. , in S 23 -6 and S 23 -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. 41 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Refer to the Johnson data in S 23 -6, S 23 -7, and S 23 -9. Compute the variable and fixed overhead variances. Use Exhibits 23 -11 and 23 -12 as guides. 42 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

6 Record transactions at standard cost and prepare a standard cost income statement 43

Standard Cost Accounting Systems Journal Entries 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 44 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Standard Cost Accounting Systems Journal Entries 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 45 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Standard Cost Accounting Systems Journal Entries Record actual overhead cost for June Record the overhead allocated to Work in process inventory computed 46 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Standard Cost Accounting Systems Journal Entries 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 47 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Standard Cost Accounting Systems Journal Entries Closes the Manufacturing overhead account and records the

Flow of Costs in a Standard Costing System 49 Copyright © 2012 Pearson Education,

Standard Cost Income Statement for Management 50 Copyright © 2012 Pearson Education, Inc. Publishing

51 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 52 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.