Flexible Budgets/Variances I Chapter Seven

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 Labor hours: 9,000 at $22.00 Cost of direct materials = $621,600 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