1
"Flexible Budget" vs. "Static Budget"
We have a "formula" by which to budget each cost or revenue item.
Typically, for a cost, y = a + bx
TC = FC + (vc/unit) (# of units)
Static budget is the target level at which the master budget is established.
Flexible budget is one prepared at a different level. E.g., for the sales level
actually achieved or the units actually produced.
Appropriate for evaluating people's performance.
Revenues typically would be budgeted so-much-per-unit $
$
Units
2
STANDARD COSTING
Basic Concept: Only the standard cost will be applied to the product for
inventory valuation and income determination.
Any difference from std. is called a "variance."
Variances are calculated and investigated (if large).
Standard cost of each product is established:
E.g.: Model 32 Widget
DM .25lb @ $20 = $5.00
DL .10hr @ $10 = $1.00
OH .10hr @ $15 = $1.50
Total Std. Cost
$7.50
Flexible budget variance = [(Actual cost) - (7.50 x units)]
. . .is analyzed into categories, causes.
DM
DL
OH
b` b`
Qty
Price
Qty
Price
[more complex]
3
HOW ARE STANDARDS SET?
Price
QTY
Direct Materials
Suppliers' price lists?
Lowest Bid?
[Who should do it?]
Blueprint?
Historical experience
Industrial engineer?
Direct Labor
Union contract?
Industry Statistics?
BLS?
Industrial engineer?
Time typical worker?
Historical experience?
Overhead is a mixed cost that is a composite of many things. Budgeted as
FIXED COST + (VARIABLE COST RATE) x (COST DRIVER)
Could be based on regression using historical costs (most
common way) or industrial engineer.
4
Variances and the Accounts: Direct Material
Accts Pay
DM Inventory
WIP
FG
AQ AQ
AQ AQ
SQ SQ
SQ SQ
xAP xAP
xSP xSP
xSP xSP
xSP xSP
a_ a_
(AP-SP)AQ
purchased
(AQ used SQ)SP
= MPV
= MUV (MQV,
MEV)
No variance
here
Examples of journal entries:
Buy 1000 lbs. DM @ $3 = $3000. SP = $2.90/lb.
i.e:
DM Inv. (AQ x SP) 2900
MPVar.
100
Accts. Pay (AQ x AP)
3000
Requisition (use) 500 lbs. for prod'n.
Produced 100 units that should require 5.2 lbs each
(SQ = 5.2 x 100 = 520)
i.e.: WIP (SQ x SP = 520 x 2.90) 1508
Material Usage Variance
58
DM Inventory (AQ x SP = 500 x 2.90) 1450
5
Direct Labor Variances in the Accounts
Wages Payable
AH x AR
AH x AR
*
WIP
SH x SR
SH x SR
a_
LRV = (AR - SR) AH
LEV = (AH - SH) SR
(= AH x AR - SH x SR)
*
FG
SH x SR
a_
* SH x SR
No Variance
Example
We actually worked 500 hrs (AH) @ $7.50/Hr (AR)
Standard for what we produced:
Std. rate (SR) = $7.25/Hr.
Std. hours (SH) = 380 units made x1.3 hrs/unit
(Hrs "earned" for output.) = 494 SH
LRV = (7.50 - 7.25) 500 =
125 unfavorable (U)
LEV = (500 - 494) 7.25 = 43.50 U
$168.50U
WIP
LRV
LEV
Wages Payable
3581.50 (SH x SR = 494 x 7.25)
125.00
43.50
3750.00 (AH x AR)
6
Variance
What it indicates
(Who's Answerable)
Rationale/Comments
MPV
=(AP-SP) AQ pur.
MUV (MQV, MEV)
=(AQ-SQ) SP
used
LRV (LPV)
= (AR-SR) AH
LEV (LQV, LUV)
= (AH-SH) SR
What combinations of events might explain:
Favorable MPV & Unfav. MUV?
Unfavorable LRV & Fav. LEV?
Unfavorable LEV & Fav. MUV?
Does "favorable" = "good" in terms of variance analysis?
What are some shortcomings of standard costing?