Financial and Managerial
Accounting
Wild, Shaw, and Chiappetta
Fifth Edition
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 21
Flexible Budgets and
Standard Costing
Conceptual Learning
Objectives
C1: Define standard costs and explain
how standard cost information is
useful for management by exception.
C2: Describe variances and what they
reveal about performance.
21-3
Analytical Learning Objectives
A1: Analyze changes in sales from
expected amounts.
21-4
Procedural Learning
Objectives
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.
21-5
Budgetary Control and
Reporting
P1
 Develop the budget
from planned objectives.
 Revise
objectives
and prepare
a new
budget.
Management uses
budgets to monitor
and control
operations.
 Compare
actual with
budget and
analyze any
differences.
 Take corrective and
strategic actions.
21-6
A1
Fixed Budget Performance
Report
OPTEL
Fixed Budget Performance Report
For the Month Ended January 31, 2013
Sales: In units
In dollars
Fixed
Budget
10,000
$ 100,000
Actual
Results
12,000
$ 125,000
Cost of goods sold
Selling expenses
Gen. & admin. expenses
Total expenses
Income from operations
$ 49,000
13,000
26,000
$ 88,000
$ 12,000
$ 58,100
15,100
26,400
$ 99,600
$ 25,400
Variances
$ 25,000 F
$
9,100
2,100
400
$ 11,600
$ 13,400
U
U
U
U
F
21-7
A1
Fixed Budget Performance
Report
Optel
If unit sales are higher, should
we expect costs to be higher?
Fixed Budget Performance Report
How much of the higher costs are because of higher unit sales?
For the Month Ended January 31, 2005
Sales: In units
In dollars
Fixed
Budget
10,000
$ 100,000
Actual
Results
12,000
$ 125,000
Cost of goods sold
Selling expenses
Gen. & admin. expenses
Total expenses
Income from operations
$ 49,000
13,000
26,000
$ 88,000
$ 12,000
$ 58,100
15,100
26,400
$ 99,600
$ 25,400
Variances
$ 25,000 F
$
9,100
2,100
400
$ 11,600
$ 13,400
U
U
U
U
F
21-8
P1
Purpose of Flexible Budgets
Show revenues and expenses
that should have occurred at the
actual level of activity.
May be prepared for any activity
level in the relevant range.
Reveal variances due to good
cost control or lack of cost
control.
Improve performance evaluation.
21-9
P1
Preparing Flexible Budgets
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
21-10
P1
Preparing Flexible Budgets
OPTEL
Flexible Budgets for Unit Sales of
For the Month Ended January 31, 2013
Sales:
Total variable costs
Contribution margin
Total fixed costs
Income from operations
Variable
Amount
per Unit
$ 10.00
4.80
$ 5.20
Total
Fixed
Cost
$ 40,000
10,000
Units
$ 100,000
48,000
$ 52,000
40,000
$ 12,000
12,000
Units
$ 120,000
57,600
$ 62,400
40,000
$ 22,400
14,000
Units
$ 140,000
67,200
$ 72,800
40,000
$ 32,800
Variable costs are expressed as
a constant amount per unit.
21-11
P1
Preparing Flexible Budgets
OPTEL
Flexible Budgets for Unit Sales of
For the Month Ended January 31, 2013
Sales:
Total variable costs
Contribution margin
Total fixed costs
Income from operations
Variable
Amount
per Unit
$ 10.00
4.80
$ 5.20
Total
Fixed
Cost
$ 40,000
10,000
Units
$ 100,000
48,000
$ 52,000
40,000
$ 12,000
12,000
Units
$ 120,000
57,600
$ 62,400
40,000
$ 22,400
14,000
Units
$ 140,000
67,200
$ 72,800
40,000
$ 32,800
Total variable cost = $4.80 per unit × budget level in units
21-12
P1
Preparing Flexible Budgets
Optel
Flexible Budgets for Unit Sales of
For the Month Ended January 31, 2013
Sales:
Total variable costs
Contribution margin
Total fixed costs
Income from operations
Variable
Amount
per Unit
$ 10.00
4.80
$ 5.20
Total
Fixed
Cost
$40,000
10,000
Units
$100,000
48,000
$ 52,000
40,000
$ 12,000
12,000
Units
$120,000
57,600
$ 62,400
40,000
$ 22,400
14,000
Units
$140,000
67,200
$ 72,800
40,000
$ 32,800
Fixed costs are expressed as a total amount that does
not change within the relevant range of activity.
21-13
P1
Flexible Budget Performance
Report
OPTEL
Flexible Budget Performance Report
For the Month Ended January 31, 2013
Sales (12,000 units)
Total variable costs
Contribution margin
Total fixed costs
Income from operations
Variable
Amount
per Unit
$ 10.00
4.80
$ 5.20
Total
Fixed
Cost
$ 40,000
Budget
for
12,000
Units
$ 120,000
57,600
$ 62,400
40,000
$ 22,400
Actual
for
12,000
Units
$ 125,000
59,400
$ 65,600
40,200
$ 25,400
Variances
$ 5,000
1,800
$ 3,200
200
$ 3,000
F
U
F
U
F
Favorable sales variance indicates that the
average selling price was greater than $10.00.
21-14
P1
Flexible Budget Performance
Report
OPTEL
Flexible Budget Performance Report
For the Month Ended January 31, 2013
Sales (12,000 units)
Total variable costs
Contribution margin
Total fixed costs
Income from operations
Variable
Amount
per Unit
$ 10.00
4.80
$ 5.20
Total
Fixed
Cost
$ 40,000
Budget
for
12,000
Units
$ 120,000
57,600
$ 62,400
40,000
$ 22,400
Actual
for
12,000
Units
$ 125,000
59,400
$ 65,600
40,200
$ 25,400
Variances
$ 5,000
1,800
$ 3,200
200
$ 3,000
F
U
F
U
F
Unfavorable cost variances indicate
costs that are greater than expected.
21-15
P1
Flexible Budget Performance
Report
OPTEL
Flexible Budget Performance Report
For the Month Ended January 31, 2013
Sales (12,000 units)
Total variable costs
Contribution margin
Total fixed costs
Income from operations
Variable
Amount
per Unit
$ 10.00
4.80
$ 5.20
Total
Fixed
Cost
$ 40,000
Budget
for
12,000
Units
$ 120,000
57,600
$ 62,400
40,000
$ 22,400
Actual
for
12,000
Units
$ 125,000
59,400
$ 65,600
40,200
$ 25,400
Variances
$ 5,000
1,800
$ 3,200
200
$ 3,000
F
U
F
U
F
Favorable variances because favorable sales
variance overcomes unfavorable cost variances.
21-16
C1
Standard Costs
Based on carefully
predetermined amounts.
Standard
Costs are
Used for planning labor, material
and overhead requirements.
The expected level
of performance.
Benchmarks for
measuring performance.
21-17
C1
Setting Standard Costs
Should we use
practical standards
or ideal standards?
Practical standards should be
set at levels that are currently
attainable with reasonable and
efficient effort.
Production
Manager
Engineer
Managerial
Accountant
21-18
C1
Setting Direct Material
Standards
Price
Standards
Quantity
Standards
Use competitive
bids for the quality
and quantity desired.
Use product
design specifications.
21-19
C1
Setting Direct Material
Standards
The standard material cost for one unit of product is:
Standard price for
one unit of material
×
Standard quantity
of material
required for one
unit of product
21-20
C1
Setting Direct Labor Standards
Rate
Standards
Time
Standards
Use wage
surveys and
labor contracts.
Use time and
motion studies for
each labor operation.
21-21
C1
Setting Direct Labor Standards
The standard labor cost for one unit of product is:
Standard wage rate
for one hour
×
Standard number
of labor hours
for one unit
of product
21-22
C1
Setting Variable Overhead
Standards
Rate
Standards
Activity
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
The activity is the
cost driver used to
calculate the
predetermined overhead.
21-23
C1
Setting Variable Overhead
Standards
The standard variable overhead cost for one unit of
product is:
Standard variable
overhead rate for
one unit of
activity
Standard number
of activity units
for one unit of
product
×
×
21-24
C1
Standard Cost Card
A standard cost card might look like this:
Cost/Production factor
Direct materials
Direct labor
Overhead
Total standard unit cost
Standard
Quantity
or Hours
1 kg.
2 hours
2 hours
Standard
Price
or Rate
$
$
$
Standard
Cost
25 per kg.
$
20 per hour
10 per hour
$
25.00
40.00
20.00
85.00
21-25
C2
Variances
A standard cost variance
is the amount by which
an actual cost differs from
the standard cost.
Amount
Variance
Standard cost
Variance
Direct
Material
Direct
Labor
Manufacturing
Overhead
Type of Product Cost
21-26
C2
Variance Analysis
Identify
questions
Receive
explanations
Conduct next
period’s
operations
Analyze
variances
Begin
Take
corrective
actions
Prepare standard
cost performance
report
21-27
P2
Computing Variances
Standard Cost Variances
Price Variance
Quantity Variance
The difference between
the actual price and the
standard price
The difference between
the actual quantity and
the standard quantity
21-28
P2
Computing Variances
Actual quantity
×
Actual price
Actual quantity
×
Standard price
Price Variance
Standard quantity
×
Standard price
Quantity Variance
Standard price is the amount that should
have been paid for the resources acquired.
21-29
P2
Computing Variances
Actual quantity
×
Actual price
Actual quantity
×
Standard price
Price Variance
Standard quantity
×
Standard price
Quantity Variance
Standard quantity is the quantity that should
have been used for the actual good output.
21-30
P2
Computing Variances
Actual quantity
×
Actual price
Actual quantity
×
Standard price
Standard quantity
×
Standard price
Price Variance
Quantity Variance
AQ(AP - SP)
SP(AQ - SQ)
AQ = Actual quantity
AP = Actual price
SP = Standard price
SQ = Standard quantity
21-31
P2
Labor Variances
Actual hours
×
Actual rate
Actual hours
×
Standard rate
Rate Variance
Materials
price- SR)
variance
AH(AR
Labor rate variance
AH
= Actual
hours
Variable
overhead
AR
= Actual
rate
spending
variance
Standard hours
×
Standard rate
Efficiency Variance
Materials
quantity
variance
SR(AH
- SH)
Labor efficiency variance
SRVariable
= Standard
rate
overhead
SHefficiency
= Standard
hours
variance
21-32
P2
Labor Cost Variances
Poorly
trained
workers
Poor
quality
materials
Unfavorable
Efficiency
Variance
Poor
supervision
of workers
Poorly
maintained
equipment
21-33
Overhead Standards and
Variances
P3
Recall that overhead costs are
assigned to products and services
using a predetermined overhead rate
(POHR):
Assigned overhead = POHR × Standard activity
POHR
=
Estimated total overhead costs
Estimated activity
21-34
P3
Setting Overhead Standards
Contains a fixed
overhead rate which
declines as activity
level increases.
Contains a variable
unit rate which stays
constant at all levels
of activity.
Overhead Rate
Function of activity level
chosen to determine rate.
21-35
P3
Total Overhead Cost Variance
(Exhibit 21.14)
Total Overhead Variance
Actual total overhead incurred – Standard total overhead applied
Controllable Variance
Actual total overhead incurred – Budgeted total overhead
Volume Variance
Budgeted fixed overhead – Applied fixed overhead
21-36
P3
Controllable Variance
Actual total overhead incurred – Budgeted total overhead
Actual total overhead
Applied total overhead (from flexible budget)
Controllable variance (unfavorable)
$ 7,650
7,500
$ 150
21-37
P3
Volume Variance
Budgeted fixed overhead – Applied fixed overhead
The same regardless of the
volume of production
Based on the standard rate
allowed for the actual volume
of production, using the
flexible budget.
Budgeted fixed overhead (standard rate at predicted capacity of 4000 units) $ 4,000
Applied fixed overhead (standard rate at actual volume of 3500 units)
3,500
Volume variance (unfavorable)
$ 500
21-38
P3
Analyzing Overhead
Variances
Controllable Variance
To help management
isolate the reasons for a
controllable variance, an
overhead variance report
can be prepared.
The report will reveal
specific costs that were
higher or lower than
expected
Volume Variance
The main purpose of
the volume variance is to
identify what portion of
the total overhead
variance is caused by
failing to meet the
expected production
level.
21-39
A1
Analyze Changes in Sales
from Expected Amounts
Sales Price
Variance
A sales price variance is
caused by a difference
between the budgeted
sales price and the actual
sales price.
Sales Volume
Variance
The sales volume variance
is caused by a difference in
the actual sales in units vs.
the budgeted sales in units.
When multiple products are involved, the sales volume
variance can be separated into a sales mix variance and
a sales quantity variance.
21-40
A1
Sales Price Variance
A sales price variance is caused by a difference between the
budgeted sales price and the actual sales price.
Sales of golf balls (units)
Sales price per golf ball
Budgeted
1,000 units
$10/ball
Actual
1,100 units
$10.50/ball
Formula:
(Actual sales x Actual price) – (Actual sales x Budgeted price)
(1,100 x $10.50) –
(1,100 x
$10.00)
$11,550
–
$11,000
= $550 Favorable variance
21-41
A1
Sales Volume Variance
The sales volume variance is caused by a difference in the
actual sales in units vs. the budgeted sales in units.
Sales of golf balls (units)
Sales price per golf ball
Budgeted
1,000 units
$10/ball
Actual
1,100 units
$10.50/ball
Formula:
(Actual sales x Budgeted price) – (Budgeted sales x Budgeted price)
(1,100 x $10.00) –
(1,000 x
$10.00)
$11,000
–
$10,000
= $1,000 Favorable variance
21-42
End of Chapter 21
21-43