Flexible Budgets and Standard Costs

1. Flexible Budgets andStandard Costs Chapter 11

2. Objective 1 Prepare a flexible budget for the income statement

3. Static Budget

4. Flexible Budget – E11-17 $440,000 $550,000 $770,000 200,000 250,000 350,000 400,000 450,000 600,000 $40,000 $100,000 $170,000

5. E11-18 Variable Fixed

6. Objective 2 Use the flexible budget to show why actual results differ from the static budget

7. Static Budget Variances Flexible Budget based on actual number of outputs Static Budget based on expectednumber of outputs Actual Results Flexible Budget Variance Sales Volume Variance Static Budget Variance

8. Static Budget (for the # units expectedto be sold) Sales Volume Variance Flexible Budget (for the # units actually sold) -

9. Flexible Budget (for the # units actually sold) Flexible Budget Variance - Actual Results

10. E11-20 140 -0- 140 5 U 145 $1,330 $210 F $1,120 $40 U $1,160 322 14 U 308 11 F 319 420 20 U 400 -0- 400 742 34 U 708 11 F 719 $588 $176 F $412 $29 U $441

11. E11-20 $588 $441 $176 F $412 $29 U Static Budget Variance $147,000 F

12. Objective 3 Identify the benefits of standard costs and learn how to set standards

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

14. 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

15. 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

16. Benefits of Standard Costs Helps managers • In budget preparation • Target levels of performance • Identify performance standards • Set sales prices • Decrease accounting costs

17. Variances Actual Price X Actual Quantity Standard Price X Actual Quantity Standard Price X Standard Quantity Price Variance Efficiency Variance Total Cost Variance

18. 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

19. 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

20. Variances Flexible Budget based on actual number of outputs Static Budget based on expectednumber of outputs Actual Results Price Variance Efficiency Variance Flexible Budget Variance Sales Volume Variance Static Budget Variance

21. Objective 4 Compute standard cost variances for direct materials and direct labor

22. E11-22 Total Cost Variance for Direct Materials: Static budget $1.10 x 7’ x 200,000 fenders $1,540,000 Actual cost$1.05 x 1,450,000 1,522,500 $17,500 F

23. E11-22 Materials price variance: Actual Quantity = 1,450,000 feet Actual Price = $1.05 Standard Price = $1.10 (Actual Price – Standard Price) x Actual Quantity ($1.05 - $1.10) x 1,450,000 feet = $72,500 F

24. E11-22 Materials efficiency variance: Actual Quantity = 1,450,000 Standard Quantity = 200,000 fenders x 7’ = 1,400,000 Standard Price = $1.10 (Actual Quantity–Standard Quantity) x Standard Price (1,450,000-1,400,000) x $1.10 = $55,000 U

25. E11-22 Total Cost Variance for Direct Labor: Static budget $13 x .025 hrs x 200,000 fenders $65,000 Actual cost$14 x 4,500 63,000 $2,000 F

26. E11-22 Labor price variance: Actual Quantity = 4,500 hours Actual Price = $14.00 Standard Price = $13.00 (Actual Price – Standard Price) x Actual Quantity ($14 - $13) x 4,500 hours = $4,500 U

27. 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

28. Objective 5 Analyze manufacturing overhead in a standard cost system

29. Manufacturing Overhead Variance Total Overhead Variance Actual Overhead Cost Standard Overhead Cost

30. Allocating Overhead in a Standard Cost System Predetermined overhead rate x Standard quantity of allocation base allowed for actual outputs

31. E11-25 Manufacturing overhead variance: Standard overhead costs: 33,000 gallons x $1.50 $49,500 Actual overhead costs: $16,200 + $32,500 48,700 $800 F

32. Manufacturing Overhead Variance Total Overhead Variance Flexible budget overhead for actual outputs Actual overhead cost Standard overhead cost Overhead Flexible Budget Variance Production Volume Variance

33. Manufacturing Overhead Variances • Overhead flexible budget variance – how well managers controlled overhead costs • Production volume variance - when actual production differs from expected production

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

35. E11-23 Production volume variance: Flexible budget overhead $46,500 Standard overhead allocated toactual production (33,000 x $1.50) 49,500 Total production volume variance $3,000 F

36. Objective 6 Record transactions at standard cost and prepare a standard cost income statement

37. Standard Cost Accounting System • Each variance has GL account • Debit balance – unfavorable • Credit balance – favorable

38. 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

39. E11-23 Materials inventory (1,450,000 x $1.10) 1,595,000 Direct materials price variance 72,500 Accounts payable (1,450,000 x $1.05) 1,522,500

40. E11-23 Work in process inventory (1,400,000 x $1.10) 1,540,000 Direct materials efficiency variance 55,000 Materials inventory (1,450,000 x $1.10) 1,595,000

41. E11-23 Manufacturing wages (4,500 x $13) 58,500 Direct labor price variance 4,500 Wages payable (4,500 x $14) 63,000

42. E11-23 Work in process inventory (5,000 x $13) 65,000 Direct labor efficiency variance 6,500 Manufacturing Wages (4,500 x $13) 58,500

43. E11-26 Western Outfitters, Inc. Standard Cost Income Statement For the Month Ended April 30 Sales revenue $560,000 Cost of goods sold at standard cost 342,000 Manufacturing 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 331,500 Gross profit $228,500

44. End of Chapter 11