Chapter Seven
Flexible Budgets/Variances
I
Static Budget Example
Webb Co. manufactures and sells jackets.
Budgeted variable costs per jacket are as follows:
Direct materials cost
$ 60
Direct manufacturing labor
16
Variable manufacturing overhead
12
Total variable costs
$ 88
Static Budget Example
Budgeted selling price is $120 per jacket.
Fixed manufacturing costs are expected
to be $276,000 per month within a relevant range
between 0 and 12,000 jackets.
Variable and fixed period costs (S&A) are ignored.
The static budget for April, 2008 is based
on selling 12,000 jackets.
There are no beginning and ending inventories
(Direct Material, WIP, Finished Goods).
Static Budget Example
Webb Co. produced and sold
10,000 jackets in April, 2008 at $125 each
with actual variable costs of $95.01
per jacket and fixed manufacturing
costs of $285,000.
Static Budget Based Variance Analysis
Flexible Budget Based Variance Analysis
Standards
Webb’s standard/budgeted cost for each
variable direct cost item is computed
as follows:
×
Standard input
allowed for
one output unit
Standard cost
per input unit
Material Standards
2.00 square yards allowed per output unit (jacket)
at $30.00 standard cost per square yard.
Standard cost per output unit (jacket)
2.00 × $30.00 = $60.00
Labor Standards
0.80 manufacturing labor-hours of input
allowed per output unit (jacket) at $20.00 standard
cost per labor hour.
Standard cost per output unit (jacket)
0.80 × $20.00 = $16.00
Actual Data
Direct materials purchased and used:
22,200 square yards at $28.00
Cost of direct materials = $621,600
Labor hours: 9,000 at $22.00
Cost of direct manufacturing labor = $198,000
Direct Material and Direct Labor Variance Analysis
Variance Summary
Market-Share and Market-Size Variances
• Webb’s sales depend on overall demand for jackets, as well
as Webb’s share of the market.
• Webb derived its total unit sales budget for April 2008 from
a management estimate of 20% market share and a budgeted
industry market size of 60,000 units (0.20 X 60,000 units =
12,000 units).
• For April 2008, actual market size was 62,500 units and
actual market share was 16% (10,000 units / 62,500 units =
0.16 or 16%)
• Webb’s sales-volume (sales-quantity) variance can now be
further subdivided into market-share and market-size
variances.
Market-Share and Market-Size Variances
Journal Entries
1a. Direct Materials Control
(22,200 square yards X $30 per square)
666,000
Direct Materials Price Variance
(22,200 square yards X $2 per square yard)
44,400
Accounts Payable Control
(22,200 square yards X $28 per square yard)
621,600
To record direct materials purchased.
Journal Entries (cont.)
1b. Work-in-Process Control
(10,000 jackets X 2 yards per jacket X $30 per square yard)
600,000
Direct Materials Efficiency Variance
(2,200 square yards X $30 per square yard)
66,000
Direct Materials Control
(22,200 square yards X $30 per square yard)
666,000
To record direct materials used.
Journal Entries (cont.)
2. Work-in-Process Control
(10,000 jackets X 0.80 hour per jacket X $20 per hour)
160,000
Direct Manufacturing Labor Price Variance
(9,000 hours X $2 per hour)
18,000
Direct Manufacturing Labor Efficiency Variance
(1,000 hours X $20 per hour)
20,000
Wages Payable Control
(9,000 hours X $22 per hour)
198,000
To record liability for direct manufacturing labor costs.
Journal Entries (cont.)
Cost of Goods Sold
59,600
Direct Materials Price Variance
44,400
Direct Materials Efficiency Variance
66,000
Direct Manufacturing Labor Price Variance
18,000
Direct Manufacturing Labor Efficiency Variance
20,000
Materials: Buy not equal Use