1. © 2009 The McGraw-Hill Companies, Inc., All Rights Reserved F LEXIBLE B UDGETS AND S TANDARD C OSTS Chapter 24

2. McGraw-Hill/Irwin Slide 2 McGraw-Hill/Irwin Slide 2 Management uses budgets to monitor and control operations.  Develop the budget from planned objectives.  Compare actual with budget and analyze any differences.  Take corrective and strategic actions.  Revise objectives and prepare a new budget. B UDGETARY C ONTROL AND R EPORTING

3. McGraw-Hill/Irwin Slide 3 McGraw-Hill/Irwin Slide 3 Improve performance evaluation. May be prepared for any activity level in the relevant range. Show revenues and expenses that should have occurred at the actual level of activity. Reveal variances due to good cost control or lack of cost control. P URPOSE OF F LEXIBLE B UDGETS A 1

4. McGraw-Hill/Irwin Slide 4 McGraw-Hill/Irwin Slide 4 P REPARATION OF F LEXIBLE B UDGETS To a budget for different activity levels, we must know how costs behave with changes in activity levels.  Total variable costs change in direct proportion to changes in activity.  Total fixed costs remain unchanged within the relevant range. Fixed Variable P 1 Let’s prepare budgets for Optel.

5. McGraw-Hill/Irwin Slide 5 McGraw-Hill/Irwin Slide 5 Exh. 21-3 P 1 Variable costs are a constant amount per unit. Total variable cost = $4.80 per unit × budget level in units Total Fixed costs do not change within the relevant range. P REPARATION OF F LEXIBLE B UDGETS

6. McGraw-Hill/Irwin Slide 6 McGraw-Hill/Irwin Slide 6 Benchmarks for measuring performance. The expected level of performance. Based on carefully predetermined amounts. Used for planning labor, material and overhead requirements. Standard Costs are S TANDARD C OSTS C 1

7. McGraw-Hill/Irwin Slide 7 McGraw-Hill/Irwin Slide 7 S ETTING S TANDARD C OSTS C 1 Quantity Standards Price Standards Direct Material Time Standards Rate Standards Direct Labor Activity Standards Rate Standards Variable Overhead

8. McGraw-Hill/Irwin Slide 8 McGraw-Hill/Irwin Slide 8 Prepare standard cost performance report Conduct next period’s operations Analyze variances Identify questions Receive explanations Take corrective actions Begin C OST V ARIANCE A NALYSIS C 2

9. McGraw-Hill/Irwin Slide 9 McGraw-Hill/Irwin Slide 9 Standard Cost Variances C OST V ARIANCE C OMPUTATIONS Quantity VariancePrice Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity C 2

10. McGraw-Hill/Irwin Slide 10 McGraw-Hill/Irwin Slide 10 Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance C OST V ARIANCE C OMPUTATIONS C 2 Standard quantity is the quantity that should have been used for the actual good output. Standard price is the amount that should have been paid for the resources acquired.

11. McGraw-Hill/Irwin Slide 11 McGraw-Hill/Irwin Slide 11 AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance C OST V ARIANCE C OMPUTATIONS C 2

12. McGraw-Hill/Irwin Slide 12 McGraw-Hill/Irwin Slide 12 Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Rate VarianceEfficiency Variance Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance AH(AR - SR) SR(AH - SH) AH = Actual Hours SR = Standard Rate AR = Actual Rate SH = Standard Hours L ABOR C OST V ARIANCES P 2

13. McGraw-Hill/Irwin Slide 13 McGraw-Hill/Irwin Slide 13 Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Estimated total overhead costs Estimated activity POHR = Assigned Overhead = POHR × Standard Activity O VERHEAD S TANDARDS AND V ARIANCES P 3

14. McGraw-Hill/Irwin Slide 14 McGraw-Hill/Irwin Slide 14 Spending Variance Efficiency Variance AH × SVRAH × AVR AH= Actual Hours of Activity AVR= Actual Variable Overhead Rate SVR= Standard Variable Overhead Rate SH= Standard Hours Allowed SH × SVR Actual Flexible Budget Applied Variable for Variable Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours C OMPUTING V ARIABLE O VERHEAD C OST V ARIANCES P 3

15. McGraw-Hill/Irwin Slide 15 McGraw-Hill/Irwin Slide 15 Spending Variance Volume Variance SFR= Standard Fixed Overhead Rate SH= Standard Hours Allowed SH × SFR Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied C OMPUTING F IXED O VERHEAD C OST V ARIANCES P 3

16. McGraw-Hill/Irwin Slide 16 McGraw-Hill/Irwin Slide 16 Total Overhead Variance Variable Overhead Fixed Overhead Efficiency Variance Spending Variance Volume Variance Spending Variance Controllable Variance P 3 C OMPUTING C ONTROLLABLE O VERHEAD V ARIANCES AND V OLUME VARIANCES

17. McGraw-Hill/Irwin Slide 17 McGraw-Hill/Irwin Slide 17 E ND OF C HAPTER 24