Copyright © 2007 Prentice-Hall. All rights reserved 1 Flexible Budgets and Standard Costs Chapter 23
Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Prepare a flexible budget for the income statement
Copyright © 2007 Prentice-Hall. All rights reserved 3 Static Budget Web Touch Responsibility Accounting Performance Report (Amounts in thousands) September 2009 Manager – All handheld devices BudgetActualVariance Operating income: PDAs$ 125$ 120$(5) Cell Phones Total operating income$599$639$ 40 This is from Chapter 22, exercise 21. When the actual activity level is higher or lower than the budgeted activity, it is difficult to determine the cause of the variance
Copyright © 2007 Prentice-Hall. All rights reserved 4 Flexible Budget – E23-15 ErgoNow Monthly Flexible Budget Per Unit Output Units (Mouse Pads) 40,000 50,000 70,000 Sales revenue$11.00 Variable expenses$ 5.20 Fixed expenses 200, ,000 Total expenses Operating income $440,000$550,000$770, ,000260,000364, ,000460,000614,000 $32,000$90,000$156,000
Copyright © 2007 Prentice-Hall. All rights reserved 5 Objective 2 Prepare an income statement performance report
Copyright © 2007 Prentice-Hall. All rights reserved 6 Static Budget Variances Sales Volume VarianceFlexible Budget Variance Actual Results Flexible Budget based on actual number of outputs Static Budget based on expected number of outputs Static Budget Variance A variance is labeled as favorable if it increases income A variance is labeled as unfavorable if it decreases income A variance is labeled as favorable if it increases income A variance is labeled as unfavorable if it decreases income
Copyright © 2007 Prentice-Hall. All rights reserved 7 Sales Volume Variance Static Budget (for the # units expected to be sold) - Flexible Budget (for the # units actually sold)
Copyright © 2007 Prentice-Hall. All rights reserved 8 Flexible Budget Variance Flexible Budget (for the # units actually sold) - Actual Results
Copyright © 2007 Prentice-Hall. All rights reserved 9 E23-17E23-17 Kyler Industries Income Statement Performance Report Year Ended December 31, 2008 Act. Results at Act Prices Flex Bud Variance Flex Bud- Act # Units Sales Volume Variance Static Budget Output units Sales rev. Variable exp. Fixed exp. Total exp. Op. income 14,50014,000 $116,000$112,000$133,000 31,900 30,800 32,200 40,000 42,000 71,900 70,800 74,200 $44,100 $41,200 $58,800 $4,000 U$21,000 F 500 U -0- 1,100 F1,400 U -0-2,000 U 1,100 F 3,400 U $2,900 U$17,600 F The variance that contributed most to the year’s favorable results was the Flexible Budget Variance and that was due to the increased selling price
Copyright © 2007 Prentice-Hall. All rights reserved 10 E23-17E23-17 Kyler Industries Income Statement Performance Report Year Ended December 31, 2008 Act. Results at Act Prices Flex Bud Variance Flex Bud- Act # Units Sales Volume Variance Static Budget Op. income $44,100 $41,200 $58,800 $2,900 U$17,600 F Static Budget Variance $14,700 F
Copyright © 2007 Prentice-Hall. All rights reserved 11 Objective 3 Identify the benefits of standard costs and learn how to set standards
Copyright © 2007 Prentice-Hall. All rights reserved 12 Standard Costs Budget for a single unit Price standards Quantity standards
Copyright © 2007 Prentice-Hall. All rights reserved 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
Copyright © 2007 Prentice-Hall. All rights reserved 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
Copyright © 2007 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 © 2007 Prentice-Hall. All rights reserved 16 VariancesVariances Efficiency VariancePrice Variance Actual Price X Actual Quantity Standard Price X Actual Quantity Standard Price X Standard Quantity Total Cost Variance
Copyright © 2007 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 Price – Standard Price) x Actual Quantity (AP – SP) x AQ
Copyright © 2007 Prentice-Hall. All rights reserved 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
Copyright © 2007 Prentice-Hall. All rights reserved 19 VariancesVariances Sales Volume VarianceFlexible Budget Variance Actual Results Flexible Budget based on actual number of outputs Static Budget based on expected number of outputs Static Budget Variance Efficiency Variance Price Variance
Copyright © 2007 Prentice-Hall. All rights reserved 20 Objective 4 Compute standard cost variances for direct materials and direct labor
Copyright © 2007 Prentice-Hall. All rights reserved 21 E23-20E23-20 Materials price variance: Actual Quantity = 145,000 feet Actual Price = $1.05 Standard Price = $1.10 (Actual Price – Standard Price) x Actual Quantity ($ $1.10) x 145,000 feet = $7,250 F
Copyright © 2007 Prentice-Hall. All rights reserved 22 E23-20E23-20 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) x $1.10 = $5,500 U The $7250 favorable direct materials price variance combined with the $5500 unfavorable direct materials efficiency variance suggests that managers may have used cheaper, lower-quality materials that resulted in more waste. The net effect is favorable ($7250 F + $5500 U = $1750 F), so this appears to have been a wise decision if quality is maintained
Copyright © 2007 Prentice-Hall. All rights reserved 23 E23-20E23-20 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
Copyright © 2007 Prentice-Hall. All rights reserved 24 E23-20E23-20 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 ( ) x $13 = $650 F The unfavorable direct labor price variance combined with the favorable direct labor efficiency variance suggests that managers may have used higher-paid, more skilled workers who performed more efficiently. Again the net effect is positive ($450 U + $650 F = $200 F), so this appears to have been a wise tradeoff
Copyright © 2007 Prentice-Hall. All rights reserved 25 Objective 5 Analyze manufacturing overhead in a standard cost system
Copyright © 2007 Prentice-Hall. All rights reserved 26 Total Overhead Variance Manufacturing Overhead Variance Actual Overhead Cost Standard Overhead Cost
Copyright © 2007 Prentice-Hall. All rights reserved 27 Allocating Overhead in a Standard Cost System Predetermined overhead rate x Standard quantity of allocation base allowed for actual outputs
Copyright © 2007 Prentice-Hall. All rights reserved 28 E23-23E23-23 Total estimated overhead: (30,000 gallons x $.50) + $30,000 = $45,000 Total budgeted production = 30,000 Overhead application rate = $1.50
Copyright © 2007 Prentice-Hall. All rights reserved 29 E23-23E23-23 Total overhead variance: Actual overhead cost$47,200 Standard overhead allocated to actual production (33,000 x $1.50)49,500 Total overhead variance$2,300 F
Copyright © 2007 Prentice-Hall. All rights reserved 30 Production Volume Variance Overhead Flexible Budget Variance Total Overhead Variance Manufacturing Overhead Variance Actual overhead cost Standard overhead cost Flexible budget overhead for actual outputs
Copyright © 2007 Prentice-Hall. All rights reserved 31 Manufacturing Overhead Variances Overhead flexible budget variance – how well managers controlled overhead costs Production volume variance – when actual production differs from expected production
Copyright © 2007 Prentice-Hall. All rights reserved 32 E23-23E23-23 Overhead flexible budget variance: Actual overhead cost$47,200 Flexible budget overhead ($.50 x 33,000) + $30,00046,500 Total overhead flexible budget variance$700 U
Copyright © 2007 Prentice-Hall. All rights reserved 33 E23-23E23-23 Production volume variance: Flexible budget overhead ($.50 x 33,000) + $30,000$46,500 Standard overhead allocated to actual production (33,000 x $1.50)49,500 Total production volume variance$3,000 F
Copyright © 2007 Prentice-Hall. All rights reserved 34 Objective 6 Record transactions at standard cost and prepare a standard cost income statement
Copyright © 2007 Prentice-Hall. All rights reserved 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
Copyright © 2007 Prentice-Hall. All rights reserved 36 E23-21E23-21 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Materials inventory (145,000 x $1.10)159,500 Direct materials price variance7,250 Accounts payable (145,000 x $1.05)152,250
Copyright © 2007 Prentice-Hall. All rights reserved 37 E23-21E23-21 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory (140,000 x $1.10)154,000 Direct materials efficiency variance5,500 Materials inventory (145,000 x $1.10)159,500
Copyright © 2007 Prentice-Hall. All rights reserved 38 E23-21E23-21 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Manufacturing wages (450 x $13)5,850 Direct labor price variance450 Wages payable (450 x $14)6,300
Copyright © 2007 Prentice-Hall. All rights reserved 39 E23-21E23-21 GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory (500 x $13)6,500 Direct labor efficiency variance650 Manufacturing Wages (450 x $13)5,850
Copyright © 2007 Prentice-Hall. All rights reserved 40 End of Chapter 23