Flexible Budgets and Standard Costs

1. Flexible Budgets andStandard Costs Chapter 23

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

3. Static Budget

4. Flexible Budget – E23-15 $440,000 $550,000 $770,000 208,000 260,000 364,000 408,000 460,000 614,000 $32,000 $90,000 $156,000

5. Objective 2 Prepare an income statement performance report

6. 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

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

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

9. E23-17 500 U 14,000 -0- 14,000 14,500 $133,000 $21,000 F $112,000 $4,000 U $116,000 32,200 1,400 U 1,100 F 31,900 30,800 42,000 2,000 U -0- 40,000 40,000 70,800 74,200 71,900 1,100 F 3,400 U $58,800 $44,100 $17,600 F $41,200 $2,900 U

10. E23-17 $58,800 $44,100 $17,600 F $41,200 $2,900 U Static Budget Variance $14,700 F

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

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

13. 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

14. 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

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

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

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 Price – Standard Price) x Actual Quantity (AP – SP) x AQ

18. 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

19. 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

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

21. E23-20 Materials price variance: Actual Quantity = 145,000 feet Actual Price = $1.05 Standard Price = $1.10 (Actual Price – Standard Price) x Actual Quantity ($1.05 - $1.10) x 145,000 feet = $7,250 F

22. E23-20 Materials efficiency variance: Actual Quantity = 145,000’ Standard Quantity = 20,000 fenders x 7’ = 140,000’ Standard Price = $1.10 (Actual Quantity–Standard Quantity) x Standard Price (145,000-140,000) x $1.10 = $5,500 U

23. E23-20 Labor price variance: Actual Quantity = 450 hours Actual Price = $14.00 Standard Price = $13.00 (Actual Price – Standard Price) x Actual Quantity ($14 - $13) x 450 hours = $450 U

24. E23-20 Labor efficiency variance: Actual Quantity = 450 hrs. Standard Quantity = 20,000 fenders x .025 = 500 hrs. Standard Price = $13.00 (Actual Quantity–Standard Quantity) x Standard Price (450 - 500) x $13 = $650 F

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

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

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

28. E23-23 Total estimated overhead: (30,000 gallons x $.50) + $30,000 = $45,000 Total budgeted production = 30,000 Overhead application rate = $1.50

29. E23-23 Total overhead variance: Actual overhead cost $47,200 Standard overhead allocated toactual production (33,000 x $1.50) 49,500 Total overhead variance $2,300 F

30. 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

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

32. E23-23 Overhead flexible budget variance: Actual overhead cost $47,200 Flexible budget overhead ($.50 x 33,000) + $30,000 46,500 Total overhead flexible budget variance $700 U

33. E23-23 Production volume variance: Flexible budget overhead ($.50 x 33,000) + $30,000 $46,500 Standard overhead allocated toactual production (33,000 x $1.50) 49,500 Total production volume variance $3,000 F

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

35. 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

36. E23-21 Materials inventory (145,000 x $1.10) 159,500 Direct materials price variance 7,250 Accounts payable (145,000 x $1.05) 152,250

37. E23-21 Work in process inventory (140,000 x $1.10) 154,000 Direct materials efficiency variance 5,500 Materials inventory (145,000 x $1.10) 159,500

38. E23-21 Manufacturing wages (450 x $13) 5,850 Direct labor price variance 450 Wages payable (450 x $14) 6,300

39. E23-21 Work in process inventory (500 x $13) 6,500 Direct labor efficiency variance 650 Manufacturing Wages (450 x $13) 5,850

40. End of Chapter 23