1. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Budgeting and Standard Cost Systems CHAPTER 13

2. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Describe budgeting, its objectives, its impact on human behavior, and types of budget systems Describe the master budget for a manufacturing company Describe the types of standards and how they are established Describe and illustrate how standards are used in budgeting Compute and interpret direct materials and direct labor variances Describe and provide examples of nonfinancial performance measures

3. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe budgeting, its objectives, its impact on human behavior, and types of budget systems Learning Objective 1

4. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Budgeting A budget is a financial plan for a business Objectives of budgeting: Establishing _____________ Executing ____________ Periodically comparing ________ to the _____

5. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Managerial Functions Affected by Budgets

6. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Human Behavior and Budgeting Importance of setting a reasonable budget: Budgets set too tightly _______ employees when expectations are too high Budgets set too loosely lead to ___________ – called “_______” the budget Employees may develop a “spend it or lose it” mentality ___________ occurs when the employees’ or managers’ self-interest differs from the company’s objectives or goals

7. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Continuous Budgeting Systems Continuous budgets maintain a 12-month projection into the future

8. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Developing Budget Estimates ____________ budgeting requires managers to estimate sales, production, and other data as though operations are being started for the first time More common methods involve revising last year’s budget: ____________

9. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Static and Flexible Budgets ______ Budget: Is based on one activity level and does not change if circumstances change Flexible Budget: Shows expected results at various __________

10. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Static and Flexible Budgets Flexible budgeting adjustments produce ______ actual-to-budget differences No. of units Produced No. of units Produced

11. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Computerized Budgeting Systems Speeds up and _______ the cost of preparing the budget Allows various operating alternatives to be easily assessed Enables the company to _________ together

12. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the master budget for a manufacturing company Learning Objective 2

13. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Master Budget Is an integrated set of _______, _______, and ________ budgets for a period of time Integrated budgets in a master budget: Budgeted _____________

14. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Relationship of the Various Income Statement Budgets

15. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Sales Budget Indicates the quantity of __________ and the selling price per unit

16. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Production Budget Feeds the following budgets: _________________ budget Quantity of direct materials needed _________________ budget Labor required for each unit of product _________________ budget Estimated factory overhead costs necessary for production

17. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Production Budget Estimates the number of units to be manufactured to meet budgeted sales and desired inventory level Expected units to be sold XXX units Plus __________________________ +XXX Less __________________________ −XXX Total units to be produced XXX units

18. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Materials Purchases Budget Materials required for production XXX units Plus __________________________ +XXX Less __________________________ −XXX Direct materials to be purchased XXX units

19. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Labor Cost Budget

20. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Factory Overhead Cost Budget

21. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Cost of Goods Sold Budget Derived from the _____ and production budgets Needs the following information: ________ budget Desired _______ Estimated ______

22. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Selling and Administrative Expenses Budget

23. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Budgeted Income Statement Derived from the following: –_________ budget –Other _____/______ data

24. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Balance Sheet Budgets Expected cash ______ and ______ during a period Combines the following: Schedule of _________ ____________ Schedule of _________ ____________ Cash Budget (_________ activity) Cash Budget (_________ activity) Summarizes plans for acquiring _________ Often prepared for five to ten years into the future Capital Expenditure Budget (________ activity) Capital Expenditure Budget (________ activity)

25. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Schedule of Collections from Sales

26. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Schedule of Payments for Manufacturing Costs

27. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Cash Budget

28. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Capital Expenditures Budget

29. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Budgeted Balance Sheet Estimates ________________ at the end of a budget period Assumes all other budgets are ____ Similar to a normal balance sheet based except that __________ are used

30. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the types of standards and how they are established Learning Objective 3

31. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Standards Are performance goals Standard costs systems: Accounting systems that use standards for _________ Enable management to determine the following: 1. __________________ (standard cost) 2. __________________ (actual cost) Provide a measure for __________ Allow measurement of ________ from performance goals

32. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Types of Standards ________ – Standards that can be achieved only under perfect operating conditions Also called ________ standards ________ – Standards that can be attained with reasonable effort Also called ________standards

33. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Standards Reviewing and Revising Standards Standard costs should be periodically reviewed to ensure ______________ are reflected Criticism of Standards Limit operating improvements beyond ________ Too difficult to maintain in a dynamic manufacturing environment Can cause employees to lose sight of the larger objectives and also unduly focus on their own operations

34. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe and illustrate how standards are used in budgeting Learning Objective 4

35. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Budgetary Performance Evaluation Standards are separated into two components: Standard ______ Standard cost per unit for direct materials, direct labor, and factory overhead is computed as: Standard Cost ________ ________ per Unit ____ ______ = ×

36. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Standard Cost per Unit Cowpoke’s standard costs per unit for its XL jeans are shown below:

37. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Budget Performance Report Report that summarizes ______, _______, and ______________ Illustration: Actual jeans sold: 5,000 pairs; Original budget of 6,000 pairs

38. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Budget Performance Report Variance: Actual Cost < Standard Cost = ________ Actual Cost > Standard Cost = ________

39. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Manufacturing Cost Variances Total Manufacturing Cost Variance: Difference between ______________ and __________ for the units produced Total Direct Materials Variance: ______ and ______ variance ______________ ________________

40. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Manufacturing Cost Variances Total Manufacturing Cost Variance: Difference between total ________ and total _________ for the units produced Total Direct Labor Variance: _____ and _____ variance ______________ ________________

41. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Summary of Manufacturing Cost Variances

42. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Compute and interpret direct materials and direct labor variances Learning Objective 5

43. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Materials Variances Direct Materials Price Variance Direct Materials Quantity Variance Direct Materials Price Variance = (_______ − ________) × _______ Direct Materials Quantity Variance = (_______ − ________) × _______

44. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Standard Price = $5 per yard Actual Price = $5.50 per yard Standard Quantity = 7,500 sq. yds. Actual Quantity = 7,300 sq. yds. (5,000 pairs * 1.5 yards/pair of jeans) Standard CostActual CostVariance Direct Materials Price Variance 7,300 sq. yards × $5 per yard = $36,500 7,300 sq. yards × $5.50 per yard = $40,150 $3,650 Unfavorable Direct Materials Quantity Variance 7,500 sq. yards × $5 per yard = $37,500 7,300 sq. yards × $5 per yard = $36,500 $1,000 Favorable Total Direct Materials Cost Variance = $2,650 _________ Direct Materials Variances

45. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Materials Variance Relationships

46. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Labor Variances Direct Labor Rate Variance Direct Labor Time Variance Actual Direct Labor Cost = _____________ × _____________ Standard Direct Labor Cost = _______________ × _____________

47. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Labor Variances Standard Rate = $9 per hour Actual Price = $10 per hour Standard Hours = 4,000 hoursActual Hours = 3,850 (5,000 pairs at.80 hours per pair) StandardActualVariance Direct Labor Rate Variance 3,850 hours × $9 per hour = $34,650 3,850 hours × $10 per hour = $38,500 $3,850 Unfavorable Direct Labor Time Variance 4,000 hours × $9 per hour = $36,000 3,850 hours × $9 per hour = $34,650 $1,350 Favorable Total Direct Labor Cost Variance = $2,500 ________

48. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Labor Variance Relationships

49. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe and provide examples of nonfinancial performance measures Learning Objective 6

50. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Nonfinancial Performance Measures Input_________Output

51. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Nonfinancial Performance Measures Should be used in conjunction with financial measures to avoid goal conflicts Common examples:

52. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. End of Chapter 13