Flexible Budgets and
Standard Costs
Chapter 11
11-1
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Objective 1
Prepare a flexible budget
for planning purposes
11-2
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Static Budget
In Touch
Responsibility Accounting Performance Report
(Amounts in thousands)
September 2009
Manager – All handheld devices
Budget Actual
Variance
Operating income:
PDAs
Cell Phones
$ 75
474
$ 60
519
$(15)
45
Total operating income
$549
$579
$ 30
11-3
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E11-18: Flexible Budget
Logiclik
Monthly Flexible Budget
Output Units (Mouse Pads)
Per Unit
40,000
50,000
70,000
Sales revenue
$11.00 $440,000 $550,000 $770,000
Variable expenses
$ 5.00
200,000
250,000
350,000
Fixed expenses
200,000
200,000
250,000
Total expenses
400,000
450,000
600,000
Operating income
$40,000 $100,000 $170,000
11-4
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E11-19: Graph Flexible Budget Costs
$800,000
$600,000
Variable
$400,000
$200,000
Fixed
$0
0
10
20
30
40
50
60
70
80
Units (in thousands)
11-5
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Objective 2
Use sales volume variance and flexible
budget variance to explain why actual
results differ from the master budget
11-6
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Static Budget Variances
Actual
Results
Flexible Budget
based on actual
number of outputs
Static Budget
based on expected
number of outputs
Flexible Budget Variance Sales Volume Variance
Static Budget Variance
11-7
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Sales Volume Variance
Static Budget
(for the # units
expected
to be sold)
minus
Flexible Budget
(for the # units
actually sold)
11-8
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Flexible Budget Variance
Flexible Budget
(for the # units
actually sold)
minus
Actual Results
11-9
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E11-22: Compute Sales Volume and
Flexible Budget Variances
Manion Industries
Income Statement Performance Report (in thousands)
Year 20X7
Act.
Flex Bud Flex Bud- Sales
Results at Variance
Act #
Volume
Act Prices
Units
Variance
140
$1,330
Sales rev.
Variable exp.
322
Fixed exp.
420
Total exp.
742
Op. income
$588
Output units
-0140
$210 F $1,120
14 U
308
20 U
400
34 U
708
$176 F
$412
Copyright © 2008 Prentice Hall All rights reserved
Static
Budget
5U
145
$40 U $1,160
11 F
319
-0400
11 F
719
$29 U
$441
11-10
E11-22: Compute Sales Volume and
Flexible Budget Variances
Manion Industries
Income Statement Performance Report (in thousands)
Year 20X7
Act.
Flex Bud Flex Bud- Sales
Results at Variance
Act #
Volume
Act Prices
Units
Variance
Op. income
$588
$176 F
$412
$29 U
Static
Budget
$441
Static Budget Variance
$147,000 F
11-11
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Objective 3
Identify the benefits
of standard costs and learn how to
set standards
11-12
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Standard Costs
• Budget for a Single Unit
• Quantity Standard
• Price Standard
11-13
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Quantity Standards Components
• Direct materials – product specifications
allowing for spoilage
• Direct labor – time requirements to
produce product as well as level of
experience needed to do specific tasks
• Manufacturing overhead – determine
resources needed for support activities
11-14
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Price Standards Components
• Direct materials – purchase price (after
early-pay discount) + freight-in + receiving
costs
• Direct labor – basic pay rates + payroll
taxes + fringe benefits
• Manufacturing overhead – determine
resources needed for support activities
and determine appropriate allocation base
11-15
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The Benefits of Standard Costs
Standards help managers plan by providing unit
amounts for budgeting
Standards help managers control by setting target
levels of performance
Standards motivate employees by serving as
performance benchmarks
Standards provide unit costs managers can use to
set sale prices of products or services
Standards simplify recordkeeping and reduce
clerical costs
11-16
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Objective 4
Compute standard cost variances
for direct materials and direct
labor
11-17
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Variance Components
Actual Price
X
Actual Quantity
Standard Price
X
Actual Quantity
Price Variance
Standard Price
X
Standard Quantity
Efficiency Variance
Total Cost Variance
11-18
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Price Variance
• Measures how well the business keeps
unit costs within standards:
(Actual Price x Actual Quantity)
– (Standard Price x Actual Quantity)
or
(Actual Price – Standard Price) x Actual Quantity
(AP – SP) x AQ
11-19
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Efficiency Variance
• Efficiency variance measures how well the
business uses its materials or human
resources:
(Standard Price x Actual Quantity)
– (Standard Price x Standard Quantity)
or
(Actual Quantity – Standard Quantity) x Standard Price
(AQ – SQ) x SP
11-20
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Variances
Flexible Budget
based on actual
number of outputs
Actual
Results
Price
Variance
Static Budget
based on expected
number of outputs
Efficiency
Variance
Flexible Budget Variance Sales Volume Variance
Static Budget Variance
11-21
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E11-27: Calculate Materials and
Labor Variances
Total Cost Variance for Direct Materials:
Hint: What is
the correct
Static budget
quantity to
use to
$1.10 x 7’ x 200,000 fenders $1,540,000
compute
Actual Cost of
Actual cost
Materials in
this variance?
$1.05 x ?
1,522,500
$17,500 F
11-22
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E11-27: Calculate Materials Price
Variance
Materials price variance:
Actual Quantity = 1,450,000 feet
Actual Price = $1.05
Standard Price = $1.10
(Actual Price – Standard Price) x Actual Quantity
($1.05 - $1.10) x 1,450,000 feet = $72,500 F
11-23
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E11-27: Calculate Materials
Efficiency Variance
Materials efficiency variance:
Actual Quantity = 1,450,000
Standard Quantity = 200,000 fenders x 7’ = 1,400,000
Standard Price = $1.10
(Actual Quantity–Standard Quantity) x Standard Price
(1,450,000-1,400,000) x $1.10 = $55,000 U
11-24
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E11-27: Calculate Cost Variance for
Direct Labor
Hint: What is
the correct
quantity of
hours to use in
computing the
cost variance
for direct
labor?
Total Cost Variance for Direct Labor:
Static budget
$13 x .025 hrs x 200,000 fenders $65,000
Actual cost
$14 x ?
63,000
$2,000 F
11-25
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E11-27: Calculate Labor Price
Variance
Labor price variance:
Actual Quantity = 4,500 hours
Actual Price = $14.00
Standard Price = $13.00
(Actual Price – Standard Price) x Actual Quantity
($14 - $13) x 4,500 hours = $4,500 U
11-26
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E11-27: Calculate Labor Efficiency
Variance
Labor efficiency variance:
Actual Quantity = 4,500 hrs.
Standard Quantity = 200,000 fenders x .025
= 5,000 hrs.
Standard Price = $13.00
(Actual Quantity–Standard Quantity) x Standard Price
(4,500 – 5,000) x $13 = $6,500 F
11-27
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Objective 5
Compute manufacturing overhead
variances
11-28
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Total Overhead Variance
Actual
Overhead Cost
Standard
Overhead Allocated to
Production
Manufacturing Overhead Variance
11-29
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Allocating Overhead in a
Standard Cost System
Predetermined overhead rate x Standard
quantity of allocation base allowed for
actual outputs
11-30
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Hint: What is
E11-30: Compute Manufacturing
the correct
to use for
Overhead Variance rate
computing
standard
overhead
costs?
Manufacturing overhead variance:
Standard overhead costs:
33,000 gallons x $?
$49,500
Actual overhead costs:
$16,200 + $32,500
48,700
$800 F
11-31
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Total Overhead Variance
Actual
overhead cost
Flexible budget
overhead for actual
outputs
Overhead Flexible
Budget Variance
Standard
overhead cost
Production Volume
Variance
Manufacturing Overhead Variance
11-32
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Manufacturing Overhead Variances
• Overhead flexible budget variance – how
well managers controlled overhead costs
• Production volume variance - when actual
production differs from expected
production
11-33
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E11-30: Compute Flexible Budget
Variance
Overhead flexible budget variance:
Actual overhead cost
$48,700
Flexible budget overhead
($.50 x 33,000) + $30,000
46,500
Total overhead flexible budget variance $2,200 U
11-34
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E11-30: Compute the Production
Volume Variance
Production volume variance:
Flexible budget overhead
Standard overhead allocated to
actual production (33,000 x $1.50)
Total production volume variance
$46,500
49,500
$3,000 F
11-35
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Objective 6 (Appendix)
Record transactions at standard
cost and prepare a standard cost
income statement
11-36
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Standard Cost Accounting Systems
•
Each variance has GL account:
•
•
•
•
Debit balance – unfavorable
Credit balance – favorable
Standard costs (not actual costs) are
used to record manufacturing costs put
into inventory accounts
Variance accounts are closed to cost of
goods sold at end of period
11-37
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E11-37: Record Materials and Labor
Transactions using Standard Cost
Accounting
GENERAL JOURNAL
DATE
DESCRIPTION
REF
Materials inventory
(1,450,000 x $1.10)
Direct materials price
variance
Accounts payable
(1,450,000 x $1.05)
DEBIT
CREDIT
1,595,000
72,500
1,522,500
11-38
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E11-37: Record Materials and Labor
Transactions
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
Work in process inventory
(1,400,000 x $1.10)
1,540,000
Direct materials efficiency
variance
55,000
Materials inventory
(1,450,000 x $1.10)
CREDIT
1,595,000
11-39
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E11-37: Record Materials and Labor
Transactions
GENERAL JOURNAL
DATE
DESCRIPTION
Manufacturing wages
(4,500 x $13)
Direct labor price variance
Wages payable
(4,500 x $14)
REF
DEBIT
CREDIT
58,500
4,500
63,000
11-40
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E11-37: Record Materials and Labor
Transactions
GENERAL JOURNAL
DATE
DESCRIPTION
Work in process inventory
(5,000 x $13)
REF
DEBIT
CREDIT
65,000
Direct labor efficiency
variance
6,500
Manufacturing Wages
(4,500 x $13)
58,500
11-41
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Western Outfitters, Inc.
Cost Income
Statement Cost
E11-39Standard
– Prepare
a Standard
For the Month
Ended April 30
Income
Statement
Sales revenue
$560,000
Cost of goods sold at standard cost
342,000
Manufacturing cost variances:
Direct materials price variance
$(2,000)
Direct materials efficiency variance
(6,000)
Direct labor price variance
4,000
Direct labor efficiency variance
(2,000)
Overhead flexible budget variance
3,500
Production volume variance
(8,000)
Total manufacturing variances
(10,500)
Cost of goods sold at actual cost
331,500
Gross profit
$228,500
11-42
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End of Chapter 11
11-43
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