1. Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 21 Flexible Budgets and Standard Costing

3. Conceptual Learning Objectives C1: Define standard costs and explain how standard cost information is useful for management by exception. 21-3

4. A1: Analyze changes in sales from expected amounts. Analytical Learning Objectives 21-4

5. P1: Prepare a flexible budget and interpret a flexible budget performance report. P2: Compute materials and labor variances. P3: Compute overhead variances. P4A: Prepare journal entries for standard costs and account for price and quantity variances. Procedural Learning Objectives 21-5

6. 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. Budgetary Control and Reporting P1 21-6

7. Fixed Budget Performance Report A1 21-7

8. If unit sales are higher, should we expect costs to be higher? How much of the higher costs are because of higher unit sales? Fixed Budget Performance Report A1 21-8

9. 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. Purpose of Flexible Budgets P1 21-9

10. 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 Preparing Flexible Budgets P1 21-10

11. Variable costs are expressed as a constant amount per unit. Preparing Flexible Budgets P1 21-11

12. Total variable cost = $4.80 per unit × budget level in units P1 Preparing Flexible Budgets 21-12

13. Fixed costs are expressed as a total amount that does not change within the relevant range of activity. P1 Preparing Flexible Budgets 21-13

14. Favorable sales variance indicates that the average selling price was greater than $10.00. P1 Flexible Budget Performance Report 21-14

15. Unfavorable cost variances indicate costs that are greater than expected. P1 Flexible Budget Performance Report 21-15

16. Favorable variances because favorable sales variance overcomes unfavorable cost variances. P1 Flexible Budget Performance Report 21-16

17. 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 Standard Costs C 1 21-17

18. Engineer Managerial Accountant Setting Standard Costs Practical standards should be set at levels that are currently attainable with reasonable and efficient effort. Production Manager Should we use practical standards or ideal standards? C 1 21-18

19. Use product design specifications. Use competitive bids for the quality and quantity desired. Quantity Standards Setting Direct Material Standards Price Standards C 1 21-19

20. The standard material cost for one unit of product is: standard quantity standard price for of material one unit of material required for one unit of product × Setting Direct Material Standards C 1 21-20

21. Setting Direct Labor Standards Use time and motion studies for each labor operation. Use wage surveys and labor contracts. Time Standards Rate Standards C 1 21-21

22. The standard labor cost for one unit of product is: standard number standard wage rate of labor hours for one hour for one unit of product × Setting Direct Labor Standards C 1 21-22

23. The activity is the cost driver used to calculate the predetermined overhead. The rate is the variable portion of the predetermined overhead rate. Setting Variable Overhead Standards Activity Standards Rate Standards C 1 21-23

24. The standard variable overhead cost for one unit of product is: standard variable standard number overhead rate for of activity units one unit of for one unit of activity product × × Setting Variable Overhead Standards C 1 21-24

25. A standard cost card might look like this: Standard Cost Card C 1 21-25

26. Type of Product Cost Amount Manufacturing Overhead Direct Material Direct Labor Standard cost A standard cost variance is the amount by which an actual cost differs from the standard cost. Variances P2 21-26

27. Prepare standard cost performance report Conduct next period’s operations Analyze variances Identify questions Receive explanations Take corrective actions Begin Variance Analysis P2 21-27

28. Standard Cost Variances Computing Variances Quantity VariancePrice Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity P2 21-28

29. Standard price is the amount that should have been paid for the resources acquired. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance Computing Variances P2 21-29

30. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance Computing Variances Standard quantity is the quantity that should have been used for the actual good output. P2 21-30

31. AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Computing Variances Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price VarianceQuantity Variance P2 21-31

32. 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 Labor Variances P2 21-32

33. Unfavorable Efficiency Variance Poorly trained workers Poor supervision of workers Poor quality materials Poorly maintained equipment P2 Labor Variances 21-33

34. 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 P3 Overhead Standards and Variances 21-34

35. Overhead Rate Contains a variable unit rate which stays constant at all levels of activity. Contains a fixed overhead rate which declines as activity level increases. Function of activity level chosen to determine rate. Setting Overhead Standards P3 21-35

36. 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 P3 Computing Variable Overhead Variances 21-36

37. 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 P3 Computing Fixed Overhead Variances 21-37

38. Total Overhead Variance Variable Overhead Fixed Overhead Efficiency Variance Spending Variance Volume Variance Spending Variance Controllable Variance Overhead Variance Analysis P3 21-38

39. Spending Variance Efficiency Variance Results from paying more or less than expected for overhead items and from excessive usage of overhead items. A function of the selected cost driver. It does not reflect overhead control. Variable Overhead Variances P3 21-39

40. Spending Variance Volume Variance Results from paying more or less than expected for fixed overhead items. Results from the inability to operate at the activity planned for the period. Has no significance for cost control. Fixed Overhead Variances P3 21-40

41. Standard Costs for Control Type of Product Cost Amount Manufacturing Overhead Direct Material Direct Labor Standard cost Managers focus on quantities and costs that differ from standards, a practice known as management by exception. C 1 21-41

42. End of Chapter 21 21-42