1B ch023_inst

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Chapter 23
1
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Prepare a flexible budget for the income
statement
Prepare an income statement performance
report
Identify the benefits of standard costs and
learn how to set standards
Compute standard cost variances for direct
materials and direct labor
2
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Analyze manufacturing overhead in a
standard cost system
Record transactions at standard cost and
prepare a standard cost income statement
3
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Budget variance—the difference between an actual
amount and a budgeted figure
Managers use variances to operate a business
Important to know why actual amounts differ from the
budget
Enables managers to identify problems and decide upon
actions to take
4
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1
2
Prepare a flexible budget & performance report for
the income statement
5
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Static budgets are
prepared for a single,
planned level of activity.
Performance
evaluation is tricky
when actual activity
differs significantly
from the planned level
of activity.
Hmm… Comparing
static budgets with
actual costs is like
comparing apples
and oranges.
Let’s look at CheeseCo.
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CheeseCo
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
How much of the $11,650 is due to activity and how much is
due to cost control?
CheeseCo
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
How well did
we control
costs?
CheeseCo
What should our variable costs be at our
actual volume? Yes, they should change
because of volume. How much they should
change is easily answered by the flexible
budget.
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Prepare for any activity
level in the relevant range.
Show revenues and expenses
that should have occurred at the
actual level of activity.
Isolate management driven variances from
volume driven ones.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
To
a budget we need to remember:
Total variable costs change
in direct proportion to
changes in activity.
Total fixed costs remain
unchanged within the
relevant range.
Fixed
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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
CheeseCo
Cost
Total
Cost
Total
Formula Fixed
Fixed
Formula
PerHour
Hour Cost
Cost
Per
Machinehours
hours
Machine
Variablecosts
costs
Variable
Indirectlabor
labor
Indirect
Indirectmaterial
material
Indirect
Power
Power
Totalvariable
variablecost
cost
Total
Fixedcosts
costs
Fixed
Depreciation
Depreciation
Insurance
Insurance
Totalfixed
fixedcost
cost
Total
Totaloverhead
overheadcosts
costs
Total
1
FlexibleBudgets
Budgets
Flexible
8,000
10,000
12,000
8,000
10,000
12,000
Hours
Hours
Hours
Hours
Hours
Hours
8,000
8,000
10,000
10,000
12,000
12,000
÷
4.00
4.00
3.00
3.00
0.50
0.50
7.50
$$ 7.50
2
3
$$ 32,000
24,000
4,000
$$ 60,000
12,000 $ 12,000
$$12,000
2,000
2,000
2,000
$ 14,000
$
$ 40,000
30,000
5,000
$ 75,000
$ 12,000
2,000
$ 14,000
$ 89,000
12,000
2,000
14,000
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CheeseCo
Cost
Total
Cost
Total
Formula Fixed
Fixed
Formula
PerHour
Hour Cost
Cost
Per
Machinehours
hours
Machine
FlexibleBudgets
Budgets
Flexible
8,000
10,000
12,000
8,000
10,000
12,000
Hours
Hours
Hours
Hours
Hours
Hours
8,000
8,000
Variablecosts
costs
Variable
Indirectlabor
labor
4.00
$ 32,000
Indirect
4.00
$
Indirectmaterial
material
3.00
24,000
Indirect
3.00
Power
0.50
4,000
Power
0.50
Totalvariable
variablecost
cost
7.50
$ 60,000
Total
$$ 7.50
$
$4.00 per hour × 12,000 hours = $48,000
Fixedcosts
costs
Fixed
Depreciation
12,000 $ 12,000
Depreciation
$
$$12,000
Insurance
2,000
Insurance
2,000
2,000
Totalfixed
fixedcost
cost
Total
$
$ 14,000
Totaloverhead
overheadcosts
costs
Total
$
10,000
10,000
12,000
12,000
40,000
30,000
5,000
75,000
$ 48,000
36,000
6,000
$ 90,000
12,000
2,000
14,000
89,000
$ 12,000
2,000
$ 14,000
$104,000
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CheeseCo
Cost
Total
Cost
Total
Formula Fixed
Fixed
Formula
PerHour
Hour Cost
Cost
Per
Machinehours
hours
Machine
Variablecosts
costs
Variable
Indirectlabor
labor
Indirect
Indirectmaterial
material
Indirect
Power
Power
Totalvariable
variablecost
cost
Total
Fixedcosts
costs
Fixed
Depreciation
Depreciation
Insurance
Insurance
Totalfixed
fixedcost
cost
Total
Totaloverhead
overheadcosts
costs
Total
FlexibleBudgets
Budgets
Flexible
8,000
10,000
12,000
8,000
10,000
12,000
Hours
Hours
Hours
Hours
Hours
Hours
8,000
8,000
4.00
4.00
3.00
3.00
0.50
0.50
7.50
$$ 7.50
$ 32,000
24,000
4,000
$ 60,000
12,000
$$12,000
2,000
2,000
10,000
12,000
10,000
12,000
Can you figure out
the total overhead
48,000
$ 40,000
costs at $8,000
30,000hours?36,000
5,000
6,000
$ 75,000
$ 90,000
$ 12,000
2,000
$ 14,000
$ 89,000
$ 12,000
2,000
$ 14,000
$104,000
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
CheeseCo
Cost
Formula
Per Hour
Total
Fixed
Cost
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable cost
Fixed costs
Depreciation
Insurance
Total fixed cost
Total overhead costs
$
4.00
3.00
0.50
7.50
$12,000
2,000
Flexible Budgets
8,000
10,000
Hours
Hours
12,000
Hours
8,000
10,000
12,000
$ 32,000
24,000
4,000
$ 60,000
$ 40,000
30,000
5,000
$ 75,000
$ 48,000
36,000
6,000
$ 90,000
$ 12,000
2,000
$ 14,000
$ 74,000
$ 12,000
2,000
$ 14,000
$ 89,000
$ 12,000
2,000
$ 14,000
$ 104,000
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
How much of the $11,650 is due to activity and how much is
due to cost control?
Static
Budget
Machine hours
Variable costs
Ind irect labor
Indirect materials
Power
Fixed costs
Depreciation
Insurance
Total overhead costs
Actual
Results
Variances
10,000
8,000
2,000 U
$ 40,000
30,000
5,000
$ 34,000
25,500
3,800
$6,000 F
4,500 F
1,200 F
12,000
2,000
12,000
2,050
0
50 U
$ 89,000
$ 77,350
$11,650 F
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
CheeseCo
Cost
Formula
Per Hour
Total
Fixed
Costs
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable costs
Fixed Expenses
Depreciation
Insurance
Total fixed costs
Total overhead costs
$
$
4.00
3.00
0.50
7.50
$ 12,000
2,000
Flexible
Budget
Actual
Results
8,000
8,000
$ 32,000
24,000
4,000
$ 60,000
$ 34,000
25,500
3,800
$ 63,300
$ 12,000
2,000
$ 14,000
$ 74,000
$ 12,000
2,050
$ 14,050
$ 77,350
Variances
0
$ 2,000 U
?
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
CheeseCo
Cost
Formula
Per Hour
Total
Fixed
Costs
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable costs
Fixed Expenses
Depreciation
Insurance
Total fixed costs
Total overhead costs
$
$
4.00
3.00
0.50
7.50
$ 12,000
2,000
Flexible
Budget
Actual
Results
8,000
8,000
$ 32,000
24,000
4,000
$ 60,000
$ 34,000
25,500
3,800
$ 63,300
$ 12,000
2,000
$ 14,000
$ 74,000
$ 12,000
2,050
$ 14,050
$ 77,350
Variances
0
$ 2,000 U
1,500 U
?
?
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
CheeseCo
Cost
Formula
Per Hour
Total
Fixed
Costs
Machine hours
Variable costs
Indirect labor
Indirect material
Power
Total variable costs
Fixed Expenses
Depreciation
Insurance
Total fixed costs
Total overhead costs
$
$
4.00
3.00
0.50
7.50
$ 12,000
2,000
Flexible
Budget
Actual
Results
8,000
8,000
$ 32,000
24,000
4,000
$ 60,000
$ 34,000
25,500
3,800
$ 63,300
$ 2,000 U
1,500 U
200 F
$ 3,300 U
$ 12,000
2,000
$ 14,000
$ 74,000
$ 12,000
2,050
$ 14,050
$ 77,350
0
50 U
50 U
$ 3,350 U
Variances
0
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
3
Identify the benefits of standard costs and learn
how to set standards
24
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An estimate of what the costs of
production should be
Based on history, competition,
engineering, supplier research, etc.
Use the total costs for each input
Example:
Our standard cost for pretzel dough is $4 per
pound.
Our standard dough quantity per pretzel is
¼ pound.
Standard cost for dough used
in one pretzel is $1.00.
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Dollars Spent
Management by exception:
Managers focus on quantities and costs
that differ from standards.
.
Standard
Pretzel
Dough
Manufacturing
Overhead
Direct
Labor
Type of Product Cost
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Budget for a single unit
Each unit has standards for price and quantity
Inputs:
Direct materials
Price – total unit cost of materials in each
product
Quantity – amount used to make each product
Direct Labor
Price – Total wage rate for employees involved
in making the product
Quantity – time used to make each product
27
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Helps managers:
Prepare the master budget
Set sales prices of products and services
Establish performance benchmarks
quantities allowed and costs per unit
Management by exception
Efficient to track standard costs through cost flow
Initial set up costs offsetting
28
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29
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Standard cost variance analysis helps us pinpoint the
cause of the flexible budget variance
32
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Compare actual production costs to standard costs to
explain the flexible budget variances
Isolate variances into price caused and quantity caused
Variance Relationships
How well material and labor
prices are kept within standards
33
How well a company uses its
materials or human resources
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4
Compute standard cost variances for direct
materials and direct labor
37
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To compute variances, use the flexible budget
and actual results
Investigate the $2,800 direct materials variance
39
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Identify costs involved for Smart Touch
Recall standard cost
Materials - $2.00 per square foot of vinyl
Labor - $10.50 per direct labor hour
Overhead
Variable overhead price (or rate) standard is $2.00 per
direct labor hour
Fixed overhead price (or rate) standard is $3.00 per direct
labor hour
Identify the cost of one unit of production
Materials = 1 square foot per DVD = $2.00
Labor = .40 hours per DVD = $4.20
Variable Overhead = .40 hours per DVD = $0.80
Actual Sales Results = 10,000
40
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41
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Two types of direct materials variances:
Direct materials price variance
Direct materials efficiency variance
42
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Johnson, Inc., is a manufacturer of lead crystal glasses. The standard
materials quantity is 0.8 pound per glass at a price of $0.30 per
pound. The actual results for the production of 6,900 glasses was 1.1
pounds per glass, at a price of $0.40 per pound.
1. Calculate the materials price variance and the materials
efficiency variance.
Materials Price Variance = (AP – SP) x AQ
= ($0.30 per pound – $0.40 per pound) x 6,900 glasses x 1.1 lb
= (– $0.10 per pound) x 7,590 pounds
= – $759 unfavorable
Direct Materials Efficiency Variance = (AQ – SQ) x SP
= (7,590 – 5,520) x $0.30 per pound
= (2,070) x $0.30 per pound
= $621 unfavorable
43
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To compute variances, use the cost computed for
the flexible budget and actual results
Follow the direct labor variance of $ 200
44
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45
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Two types of direct labor variances:
Direct labor price (rate) variance
Direct labor efficiency variance
46
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Johnson, Inc., manufactures lead crystal glasses. The standard direct
labor time is 0.3 hour per glass, at a price of $13 per hour. The
actual results for the production of 6,900 glasses were 0.2 hour per
glass, at a price of $10 per hour.
1. Calculate the labor price variance and the labor efficiency
variance.
Direct Labor Price Variance = (AP – SP) x AH
= ($10.00 – $13.00) x 1,380 hours
= ($3.00) x 1,380 hours
= $4,140 favorable
Direct Labor Efficiency Variance = (AH – SH) x SP
= (1,380 hours – 2,070 hours) x $13.00 per hour
= (690 hours) x $13.00 per hour
= $8,970 favorable
47
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5
Analyze manufacturing overhead in a standard
cost system
48
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Total overhead variance—the difference between actual overhead
cost and standard overhead allocated to production
Allocating Overhead in a Standard Cost System
49
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Refer to the data from Johnson, Inc., in S23-6 and S23-7. The
following information relates to the company’s overhead costs:
Static budget variable overhead $ 9,000
Static budget fixed overhead
$ 4,500
Static budget direct labor hours
1,800 hours
Static budget number of glasses 6,000
Johnson allocates manufacturing overhead to production based on
standard direct labor hours. Last month, Johnson reported the
following actual results: actual variable overhead, $10,200; actual
fixed overhead, $2,830.
1. Compute the standard variable overhead rate and the standard
fixed overhead rate.
Standard overhead rate = Budgeted overhead cost
Budgeted direct labor hours
Standard variable = $9,000 / 1,800 hours = $5 per DL hour
Standard fixed = $4,500 / 1,800 hours = $2.50 per DL hour
50
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Variable overhead variance analysis should tell us if we
spent more in overhead by using too many hours of the
cost driver, or too many resources during each hour.
51
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52
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Two types of variable overhead variances:
Variable overhead spending (price) variance
Variable overhead efficiency variance
53
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Refer to the Johnson data in S23-6, S23-7, and S23-9.
Compute the variable overhead variance.
Use Exhibits 23-11 and 23-12 as guides.
VOH Spending Variance =(AP x AH) - (SP x AH)
= 10,200 – (1,380 x $5) = $3,300 (U)
VOH Efficiency Variance = (AH – SH) x SP
= (1,380 – 2,070) x $5 = $3,450 (F)
54
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To compute variances, use the cost computed for
the flexible budget and actual results
Follow the fixed overhead variance of $2,700
55
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Total overhead variance—the difference between actual overhead
cost and standard overhead allocated to production
Allocating Overhead in a Standard Cost System
56
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Two types of variable overhead variances
Spending: We overspent on the set amount of fixed overhead
resources we bought, hence the $2,700 unfavorable pricing
variance
Volume Variance: We over-applied FMOH based on our
standard time allowed, indicating that we may have excess
underutilized capacity.
57
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Refer to the Johnson data in S23-6, S23-7, and S23-9.
Compute the fixed overhead variances.
Use Exhibits 23-12 as a guide.
FOH Spending Variance = Actual fixed overhead – Budgeted fixed
overhead
= $2,830 – (1,800 x $2.50) = $1,670 (F)
FOH Volume Variance = Actual fixed overhead – Applied fixed
overhead
= (1,800 x $2.50) – (2,070 x $2.50)
= $675 (F)
58
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
6
Record transactions at standard cost and
prepare a standard cost income statement
59
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Records variances from standards as soon as possible
Records direct materials price variances when materials
are purchased
Work in process inventory is debited at standard input
quantities and standard prices
60
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Manufacturing wages is debited at standard
prices for direct labor hours actually used
Work in process inventory is debited for the
standard cost per direct labor hour that should
have been used
61
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Record actual overhead cost for June
Record the overhead allocated to Work in
process inventory computed
62
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Record the transfer of the standard cost of the
DVDs completed from Work in process
inventory to Finished goods
Record the transfer of the cost of sales of the
10,000 DVDs sold at standard cost
63
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Closes the Manufacturing overhead account and
records the overhead variances
64
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65
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66
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
The master budget is a static budget, which means it
is prepared for only one level of sales volume. A
variance is the difference between an actual amount
and a budgeted amount. A flexible budget summarizes
costs and revenues for several different volume levels
within a relevant range.
An income statement performance report is prepared
at the end of the period to measure actual results
against the flexible and static budgets. A static budget
variance occurs because actual activity differed from
what was expected in the static budget.
67
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The static budget variance is divided into two
variances: The flexible budget variance arises because
the company had different revenues and/or costs than
expected for the actual level of units sold. The sales
volume variance arises because the actual number of
units sold differed from the number of units on which
the static budget was based.
Most companies use standard costs to develop their
flexible budgets. Standard cost is a budget for a single
unit of materials, labor, and overhead. Price variances
measure the difference in actual and standard prices.
Efficiency variances measure the difference in actual
and standard quantities used.
68
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Standard cost variances for direct materials and direct
labor are each split between the price variance and
efficiency variance. The price variance measures the
difference between actual and standard price for direct
materials and labor used. The efficiency variance
measures the difference between actual and standard
usage for direct materials and labor based on standard
prices. In analyzing each variance, management must
consider the overall effect of each decision and how it
affected overall results for the production period.
69
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
When companies utilize standard costs, journal entries
are made using standard costs, and variances are
recorded at the same time. The variances are then
shown on a standard costing income statement to
highlight variances to management for more efficient
decision making.
70
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Copyright
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
72
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