Flexible Budgets and Standard Costs
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Transcript of Flexible Budgets and Standard Costs
24 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Flexible Budgets and
Standard CostsChapter
24
24 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 1
Prepare a flexible budgetfor the income statement.
24 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Oasis PoolsComparison of Actual Results with Static Budget
For the Month Ended May 31, 2002 Actual Static
Results Budget VariancePools 10 8 2 FRevenues $150,000 $120,000 $30,000 FExpenses 119,000 95,000 $24,000 UIncome $ 31,000 $ 25,000 $ 6,000 F
Static versus Flexible Budgets
24 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Static versus Flexible Budgets
Expected Output Volume Only
Static Budget
(8 Pools)
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Static versus Flexible Budgets
Range of Output Volumes
Flexible Budget
(5 Pools) (8 Pools) (10 Pools)
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Flexible Budgets
What are the flexible budgets for Oasis Poolswhen expected volume is 5, 8, and 10 pools?
Budgeted sales price per pool is $15,000.Budgeted variable expenses per pool are $10,375.
Total budgeted fixed cost is $12,000.
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Flexible Budgets
Oasis Pools Flexible BudgetsUnits 5 8 10Sales revenue $75,000 $120,000 $150,000Variable expenses 51,875 83,000 103,750Fixed expenses 12,000 12,000 12,000Operating income $11,125 $ 25,000 $ 34,250
24 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Graphing the FlexibleBudget Formula
$0
$130,000
0 5 8 10
Number of Swimming Pools Installed
Tota
l Exp
ense
s
$115,750
$95,000
$63,875
$12,000
Variable cost$10,375per poolinstalled
Fixed cost$12,000
per month
Total cost line
24 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Graphing the FlexibleBudget Formula
The flexible budget graph showsbudgeted expenses for 10 pools.
Variable expenses $103,750Fixed expenses 12,000Total expenses $115,750
May actual expenses were $119,000.They exceeded the budgeted by $3,250.
24 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 2
Prepare an income statementperformance report.
24 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Oasis Pools Performance Report
Actual Flexible Static Results Budget Budget
Pools 10 10 8Revenues $150,000 $150,000 $120,000Variable expenses 105,000 103,750 83,000Fixed expenses 14,000 12,000 12,000Total expenses 119,000 115,750 95,000Income $ 31,000 $ 34,250 $ 25,000
24 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Oasis Pools Performance Report
Flexible Budget Variance Sales Volume Variance
ActualResults$31,000
StaticBudget$25,000
FlexibleBudget$34,250
$3,250 U $9,250 F
24 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Oasis Pools Performance Report
Static Budget Variance
ActualResults$31,000
StaticBudget$25,000
$6,000 U
24 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Flexible Budgetand Variance Analysis
The flexible budget variance is the difference between what the company spent at the actual level of output and what it should have spent to obtain the actual level of output.
It highlights the difference between actual costs and flexible budget costs.
24 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Flexible Budgetand Variance Analysis
Oasis Pools actually incurred $105,000 of variable costs to install the 10 pools.
This was $1,250 more than the $103,750 budgeted variable cost for 10 pools.
Oasis Pools also spent $2,000 more than budgeted on fixed expenses ($14,000 – $12,000).
24 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 3
Identify the benefitsof standard costs.
24 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Benefits of Standard Costs
Standard costs are carefully predetermined costs.
They help managers plan by providing the unit amounts, which are the building blocks of budgeting.
They help simplify record keeping. Standard quantity often is referred to as the
quantity that should have been used.
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Objective 4
Compute standard cost variancesfor direct materials and direct labor.
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Direct Material andDirect Labor Variances
1 Price, or rate, which measures how well the business keeps unit prices of materials and labor within standards.
2 Efficiency, or quantity, which measures whether the quantity of materials or labor used to make the actual number of outputs is within the budget.
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Price Variance...
– is the difference between the actual price and standard price of inputs used multiplied by the actual quantity of inputs.
Price variance = (Actual quantity × Actual price) – (Actual quantity × Standard price) or...
Actual quantity × (AP – SP)
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Efficiency Variance...
– is the difference between the actual and standard quantity of inputs allowed multiplied by the standard price of input.
Efficiency variance = (Actual quantity × Standard price) – (Standard quantity × Standard price) or...
Standard price × (AQ – SQ)
24 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Variance analysis begins with a total variance to be explained – in this example, $3,250.
Actual variable expenses $105,000Flexible budget –103,750 Difference 1,250
Actual fixed expenses were $2,000more than budgeted.
Example of Standard Costing
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Materials Variances
Direct materials cost was $3,575 per cubic foot.SQ of materials allowed (gunite)
was 1,000 cubic feet per pool.
Standards
Actual Results (10 pools were built)
AP paid per cubic foot = $3.00AQ of materials used = 12,000 cubic feet
24 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Price variance: 12,000($3.00 – $3.575) = $6,900 favorable
Efficiency variance:$3.575(12,000 – 10,000) = $7,150 unfavorable
Flexible budget variance:$6,900 – $7,150 = $250 unfavorable
Materials Variances
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Materials Variances
Actual cost incurred: (Actual inputs × Actual price) = 12,000 × $3 = $36,000
Standard cost of actual inputs: (Actual inputs × Standard price) = 12,000 × $3.575 = $42,900
Flexible budget: (Standard inputs × Standard price) = 10,000 × $3.575 = $35,750
24 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Labor Variances
Standards
Actual Results (10 pools were built)
Direct labor cost was $6,000 per pool.SP (rate) was $15 per hour.
Standard hours per pool was 400.
AP (actual rate) was $16.10 per hour.AQ (actual hours) was 3,800.
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Labor Variances
Price (or rate) variance:3,800($16.10 – $15.00) = $4,180 unfavorable
Efficiency variance:$15.00(3,800 – 4,000) = $3,000 favorable
Flexible budget variance:$4,180 – $3,000 = $1,180 unfavorable
24 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Labor Variances
Actual cost incurred: (Actual inputs × Actual price) = 3,800 × $16.10 = $61,180
Standard cost of actual inputs: (Actual inputs × Standard price) = 3,800 × $15 = $57,000
Flexible budget: (Standard inputs × Standard price) = 4,000 × $15 = $60,000
24 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Flexible Budget Variancesfor Materials and Labor
Flexible budget variance for materials $ 250 UFlexible budget variance for labor 1,180 UTotal variances $1,430 U
Total flexible budget variance $3,250 UMaterials and labor variances 1,430 UFlexible budget overhead variances $1,820 U
24 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Objective 5
Analyze manufacturing overheadin a standard cost system.
24 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Manufacturing Overhead Variances
The flexible budget variance for manufacturing overhead shows whether managers are keeping total overhead costs within the budgeted amount for the actual production of the period.
The production volume variance arises when actual production differs from the level in the static budget.
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Allocating Overhead to Production
Oasis Pools allocates manufacturing overhead to production based on standard direct labor hours for the actual number of outputs.
The static budget, which is based on expected output of 8 pools, is known at the beginning of the period.
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Allocating Overhead to Production
Standards
Actual Results (10 pools were built)
Variable overhead cost was $800 per pool.Standard hours per pool were 400.Fixed overhead cost was $12,000.
Actual variable overhead was $7,820.Actual hours were 3,800, fixed overhead was
$14,000, and total overhead was $21,820.
24 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Allocating Overhead to Production
In a standard cost system, manufacturing overhead is allocated to production based on a predetermined overhead rate.
Most companies base their predetermined overhead rates on amounts from the static (master) budget which is known at the beginning of the year.
24 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Allocating Overhead to Production
Oasis PoolsBudget Data for the Month Ended May 30, 2002
Budget type Static FlexiblePools 8 10Standard direct labor hours 3,200 4,000Overhead cost:
Variable $ 6,400 $ 8,000Fixed 12,000 12,000
Total $18,400 $20,000
24 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Allocating Overhead to Production
Standard variable overhead rate per hour:$6,400 ÷ 3,200 = $2.00
Standard fixed overhead rate per hour:$12,000 ÷ 3,200 = $3.75
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Total ManufacturingOverhead Variance...
– is the amount of underallocated or overallocated manufacturing overhead.
This is the difference between actual manufacturing overhead and allocated manufacturing overhead.
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Total ManufacturingOverhead Variance
How much standard overhead is allocated to production?
4,000 × $2.00 $ 8,000 variable4,000 × $3.75 15,000 fixedTotal $23,000
Total manufacturing overhead cost variance:$23,000 – $21,820 = $1,180 favorable
24 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Total ManufacturingOverhead Variance
The total manufacturing overhead variance is split into the manufacturing flexible budget variance and the production volume variance.
Flexible budget overhead for actual production = $12,000 + (4,000 × $2) = $20,000.
24 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Overhead Flexible Budget Variance
Oasis Pools – a comparison of actual results withthe flexible budget overhead for actual production:
Actual Results Flexible Budget VariancePools 10 10Overhead cost:Variable $ 7,820 $ 8,000 $ 180 FFixed 14,000 12,000 $2,000 UTotal $21,820 $20,000 $1,820 UOverhead flexible variance is $1,820 unfavorable.
24 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Variable Overhead Variances
Actual cost incurred: (Actual inputs × Actual price) = $7,820
Standard cost of actual inputs: (Actual inputs × Standard price) = $7,600
Flexible budget: (Standard inputs × Standard price) = $8,000
24 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Production Volume Variance...
– is the difference between the fixed overhead cost in the flexible budget for actual production and the standard fixed overhead allocated to production.
4,000 × $3.75 = $15,000 allocated How much is the volume variance? $12,000 – $15,000 = $3,000 favorable volume
variance
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Flexible budget variance $1,820 UVolume variance 3,000 FTotal $1,180 F
Total Overhead Variances
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Flexible Budget Variance
Flexible budget variance: $3,250 UMaterials $ 250 ULabor 1,180 UFlexible budget for overhead 1,820 UTotal $3,250 U
24 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Total Variances
Why was actual income $3,250 less than the flexible budget for 10 pools?
Variable costs exceeded the flexible budget by $1,250 and actual fixed costs exceeded the static budget by $2,000.
24 - 46©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Record transactionsat standard cost.
Objective 6
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What is the entry to record the purchaseof 12,000 cubic feet of materials (actualprice paid was $3.00 per cubic foot andthe standard being $3.575/cubic foot)?
Standard Costs in the Accounts
Materials Inventory 42,900Direct Materials Price Variance 6,900Accounts Payable 36,000To record purchases of direct materials
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What is the entry to record the transfer of12,000 actual cubic feet of materials to
work in process inventory?
Standard Costs in the Accounts
Work in Process Inventory 35,750*Direct MaterialsEfficiency Variance 7,150Materials Inventory 42,900To record use of materials*10,000 SQ × $3.575 SP
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Standard Costs in the Accounts
Notice that in these entries direct materials price variance is recorded at the time of purchase.
An unfavorable variance has a debit balance which increases the expense.
A favorable variance has a credit balance in the accounts and is a reduction in expenses.
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Standard Costs in the Accounts
Manufacturing Overhead 21,820 Accounts Payable, Accumulated Depreciation, and Other accounts 21,820To record actual overhead costs incurred
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Standard Costs in the Accounts
What is the entry to record allocatedmanufacturing overhead?
Work in Process Inventory 23,000Manufacturing Overhead 23,000
To allocate overhead
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Other Entries
Finished Goods Inventory 118,750Work in Process Inventory 118,750
To record completion of 10 pools
Cost of Goods Sold 118,750Finished Goods Inventory 118,750
To record sale of 10 pools
24 - 53©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Closing Variances
Unfavorable Variances
Favorable VariancesMaterials price $ 6,900Labor efficiency 3,000Production volume 3,000Total $12,900
Materials efficiency $ 7,150Labor rate 4,180Flexible budget 1,820Total $13,150
24 - 54©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Closing Variances
$13,150 unfavorable – $12,900 favorable= $250 unfavorable
Income Summary 250Net Variance 250
To close various variances
This entry increases the cost of goods sold.
24 - 55©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Prepare a standard costincome statementfor management.
Objective 7
24 - 56©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Standard Cost Income Statement for Management
Standard CostingRevenues $150,000Cost of goods sold 118,750Unadjusted income $ 31,250
Actual CostingRevenues $150,000Cost of goods sold 119,000Unadjusted income $ 31,000
24 - 57©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Standard Cost Income Statement for Management
Closing the $250 net unfavorable variance to income summary increases the cost of goods sold to $119,000.
This produces the $31,000 income figure.
24 - 58©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
End of Chapter 24