Flexible Budgets and Standard Costs by jonbf

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									Flexible Budgets
      and
Standard Costs

  Chapter 24
       Objective 1


Prepare a Flexible Budget
for the Income Statement.
     Static Versus Flexible Budgets

                  Oasis Pools
Comparison of Actual Results with Static Budget
      For the Month Ended May 31, 2005
            Actual        Static
            Results      Budget      Variance
Pools         10            8            2 F
Revenues $150,000       $120,000     $30,000 F
Expenses 119,000          95,000     $24,000 U
Income $ 31,000         $ 25,000     $ 6,000 F
Static versus Flexible Budgets

         Static Budget




           (8 Pools)
  Expected Output Volume Only
 Static versus Flexible Budgets

            Flexible Budget




(5 Pools)      (8 Pools)      (10 Pools)
       Range of Output Volumes
              Flexible Budgets

   Budgeted sales price per pool is $15,000.
Budgeted variable expenses per pool are $10,375.
     Total budgeted fixed cost is $12,000.

  What are the flexible budgets for Oasis Pools
  when expected volume is 5, 8, and 10 pools?
                    Flexible Budgets

              Oasis Pools Flexible Budgets
Units                      5          8        10
Sales revenue       $75,000    $120,000 $150,000
Variable expenses    51,875      83,000 103,750
Fixed expenses       12,000      12,000   12,000
Operating income    $11,125    $ 25,000 $ 34,250
                                 Graphing the Flexible
                                   Budget Formula
                 $130,000                 Total cost line
                 $115,750
Total Expenses




                 $95,000
                                                                          Variable cost
                                                                             $10,375
                 $63,875                                                    per pool
                                                                            installed

                                                                           Fixed cost
                 $12,000
                                                                            $12,000
                      $0                                                   per month
                            0                    5          8        10
                                Number of Swimming Pools Installed
      Graphing the Flexible
        Budget Formula
   The flexible budget graph shows
   budgeted expenses for 10 pools.

Variable expenses        $103,750
Fixed expenses             12,000
Total expenses           $115,750

 May actual expenses were $119,000.
 They exceeded the budget by $3,250.
       Objective 2


Use the Flexible Budget to
Show Why Actual Results
  Differ from the Static
          Budget.
     Oasis Pools Performance Report

                     Actual    Flexible    Static
                     Results    Budget     Budget
Pools                  10         10          8
Revenues            $150,000   $150,000   $120,000
Variable expenses    105,000    103,750     83,000
Fixed expenses        14,000     12,000     12,000
Total expenses       119,000    115,750     95,000
Income              $ 31,000   $ 34,250   $ 25,000
Oasis Pools Performance Report


 Actual                  Flexible                   Static
Results                  Budget                    Budget
$31,000                  $34,250                   $25,000
          $3,250 U                     $9,250 F
    Flexible Budget Variance    Sales Volume Variance
Oasis Pools Performance Report


 Actual                             Static
Results                            Budget
$31,000                            $25,000
              $6,000 U
          Static Budget Variance
        The Flexible Budget
       and 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.
        The Flexible Budget
       and 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).
       Objective 3

     Identify the Benefits
of Standard Costs and Learn
    How to Set Standards.
    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.
      Objective 4


Compute Standard Cost
        Variances
for Direct Materials and
      Direct Labor.
       Direct Material and
      Direct 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.
           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)
       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)
    Example of Standard Costing

Variance analysis begins with a total variance
  to be explained – in this example, $3,250.

Actual variable expenses         $105,000
Flexible budget                  –103,750
Difference                          1,250

     Actual fixed expenses were $2,000
            more than budgeted.
            Materials Variances
                   Standards
Direct materials cost was $3.575 per cubic foot.
          Materials allowed (gunite)
        was 1,000 cubic feet per pool.
                Actual Results
             (10 pools were built)
       AP paid per cubic foot = $3.00
   AQ of materials used = 12,000 cubic feet
          Materials Variances

               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
         Labor Variances

               Standards
Direct labor cost was $6,000 per pool.
     The rate was $15 per hour.
 Standard hours per pool were 400.

           Actual Results
        (10 pools were built)
AP (actual rate) was $16.10 per hour.
   AQ (actual hours) was 3,800.
            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
       Flexible Budget Variances
        for Materials and Labor
Flexible budget variance for materials $ 250 U
Flexible budget variance for labor      1,180 U
Total variances                        $1,430 U

Total flexible budget variance        $3,250 U
Materials and labor variances          1,430 U
Flexible budget overhead variances    $1,820 U
       Objective 5


  Analyze Manufacturing
         Overhead
in a Standard Cost System.
        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.
      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.
       Allocating Overhead to
             Production
                 Standards
 Variable overhead cost was $800 per pool.
     Standard hours per pool were 400.
     Fixed overhead cost was $12,000.
    Actual Results (10 pools were built)
   Actual variable overhead was $7,820.
Actual hours were 3,800, fixed overhead was
 $14,000, and total overhead was $21,820.
      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.
          Allocating Overhead to
                Production
                    Oasis Pools
 Budget Data for the Month Ended May 30, 2005
Budget type                  Static   Flexible
Pools                           8         10
Standard direct labor hours 3,200        4,000
Overhead cost:
   Variable              $ 6,400    $ 8,000
   Fixed                     12,000     12,000
Total                      $18,400    $20,000
     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
       Total Manufacturing
       Overhead Variance...
…is the amount of underallocated or
  overallocated manufacturing overhead.
• This is the difference between actual
  manufacturing overhead and allocated
  manufacturing overhead.
         Total Manufacturing
         Overhead Variance
       How much standard overhead
        is allocated to production?

4,000 × $2.00              $ 8,000 variable
4,000 × $3.75               15,000 fixed
Total                      $23,000

Total manufacturing overhead cost variance:
   $23,000 – $21,820 = $1,180 favorable
          Total Manufacturing
          Overhead 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.
        Overhead Flexible Budget
               Variance
 Oasis Pools – a comparison of actual results with
the flexible budget overhead for actual production:
              Actual Results Flexible Budget Variance
Pools              10          10
Overhead cost:
Variable     $ 7,820 $ 8,000 $ 180 F
Fixed            14,000      12,000 $2,000 U
Total           $21,820 $20,000 $1,820 U
Overhead flexible variance is $1,820 unfavorable.
  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
 Production Volume Variance...
– is the difference between the overhead cost
  in the flexible budget for actual production
  and the standard 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
   Total Overhead Variances


Flexible budget variance       $1,820 U
Volume variance            3,000 F
Total                          $1,180 F
     Flexible Budget Variance

   Flexible budget variance: $3,250 U
Materials                        $ 250 U
Labor                             1,180 U
Flexible budget for overhead      1,820 U
Total                            $3,250 U
           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.
       Objective 6


  Record Transactions at
Standard Cost and Prepare a
   Standard Cost Income
        Statement.
      Standard Costs in the Accounts

      What is the entry to record the purchase
      of 12,000 cubic feet of materials (actual
      price paid was $3.00 per cubic foot and
      the standard being $3.575/cubic foot)?
Materials Inventory                  42,900
  Direct Materials Price Variance             6,900
  Accounts Payable                            36,000

To record purchases of direct materials
      Standard Costs in the Accounts
     What is the entry to record the transfer of
      12,000 actual cubic feet of materials to
           work in process inventory?
Work in Process Inventory        35,750*
Direct Materials
Efficiency Variance               7,150
   Materials Inventory                                42,900

To record use of materials
*10,000 standard cubic feet × $3.575 standard price
 Standard Costs in the Accounts
• Notice that in these entries, the 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.
      Standard Costs in the Accounts

Manufacturing Overhead           21,820
  Accounts Payable,
  Accumulated Depreciation,
  and Other accounts                       21,820

To record actual overhead costs incurred
     Standard Costs in the Accounts

       What is the entry to record allocated
            manufacturing overhead?
Work in Process Inventory        23,000
   Manufacturing Overhead                  23,000
To allocate overhead
               Other Entries

Finished Goods Inventory      118,750
   Work in Process Inventory          118,750
To record completion of 10 pools

Cost of Goods Sold          118,750
   Finished Goods Inventory         118,750
To record sale of 10 pools
              Closing Variances

Unfavorable Variances
Materials efficiency $ 7,150
Labor rate             4,180
Flexible budget        1,820
Total                $13,150 Favorable Variances
                     Materials price    $ 6,900
                     Labor efficiency      3,000
                     Production volume     3,000
                     Total              $12,900
          Closing Variances

 $13,150 unfavorable – $12,900 favorable
           = $250 unfavorable

Income Summary                 250
   Net Variance                      250
To close various variances

This entry increases the cost of goods sold.
  Standard Cost Income
Statement for Management
       Standard Costing
Revenues                $150,000
Cost of goods sold       118,750
Unadjusted income       $ 31,250
         Actual Costing
Revenues                $150,000
Cost of goods sold       119,000
Adjusted income         $ 31,000
      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.
End of Chapter 24

								
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