Managerial Accounting Wild and Shaw Third Edition McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. 1

Flexible Budgets and Standard Costing Chapter 8 Flexible Budgets and Standard Costing

Conceptual Learning Objectives C1: Define standard costs and explain how standard cost information is useful for management by exception . 8-3

Analytical Learning Objectives A1: Analyze changes in sales from expected amounts. 8-4

Procedural Learning Objectives P1: Prepare a flexible budget and interpret a flexible budget performance report. P2: Compute materials and labor variances. P3: Compute overhead variances. P4A: Prepare journal entries for standard costs and account for price and quantity variances. 8-5

Budgetary Control and Reporting Develop the budget from planned objectives. Revise objectives and prepare a new budget. Compare actual with budget and analyze any differences. Management uses budgets to monitor and control operations. Take corrective and strategic actions. 8-6

Purpose of Flexible Budgets Show revenues and expenses that should have occurred at the actual level of activity. May be prepared for any activity level in the relevant range. Reveal variances due to good cost control or lack of cost control. Improve performance evaluation. 8-7

Preparing Flexible Budgets To a budget for different activity levels, we must know how costs behave with changes in activity levels. Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. Fixed Variable 8-8

Standard Costs Based on carefully predetermined amounts. Standard Costs are Used for planning labor, material and overhead requirements. The expected level of performance. Benchmarks for measuring performance. 8-9

Setting Direct Material Standards Price Standards Quantity Standards Use product design specifications. Use competitive bids for the quality and quantity desired. 8-10

Setting Direct Labor Standards Time Standards Rate Standards Use time and motion studies for each labor operation. Use wage surveys and labor contracts. 8-11

Setting Variable Overhead Standards C 1 Activity Standards Rate Standards The activity is the cost driver used to calculate the predetermined overhead. The rate is the variable portion of the predetermined overhead rate. 8-12

Manufacturing Overhead Variances P2 A standard cost variance is the amount by which an actual cost differs from the standard cost. Direct Material Standard cost Amount Direct Labor Manufacturing Overhead Type of Product Cost 8-13

Variance Analysis Begin Take corrective actions Identify questions P2 Take corrective actions Identify questions Receive explanations Conduct next period’s operations Analyze variances Prepare standard cost performance report Begin 8-14

Computing Variances Standard Cost Variances Quantity Variance Price Variance The difference between the actual price and the standard price The difference between the actual quantity and the standard quantity 8-15

Labor Variances Unfavorable Efficiency Variance Poorly trained workers Poor supervision of workers Poor quality materials Poorly maintained equipment Unfavorable Efficiency Variance 8-16

Setting Overhead Standards P3 Contains a fixed overhead rate which declines as activity level increases. Contains a variable unit rate which stays constant at all levels of activity. Overhead Rate Function of activity level chosen to determine rate. 8-17

Overhead Variance Analysis P3 Total Overhead Variance Variable Overhead Fixed Overhead Spending Variance Efficiency Variance Spending Variance Volume Variance Controllable Variance 8-18

End of Chapter 8 8-19