Copyright © 2008 Prentice Hall All rights reserved 11-1 Flexible Budgets and Standard Costs Chapter 11

Copyright © 2008 Prentice Hall All rights reserved 11-2 Objective 1 Prepare a flexible budget for planning purposes

Copyright © 2008 Prentice Hall All rights reserved 11-3 Static Budget In Touch Responsibility Accounting Performance Report (Amounts in thousands) September 2009 Manager – All handheld devices BudgetActualVariance Operating income: PDAs$ 75$ 60$(15) Cell Phones Total operating income$549$579$ 30

Copyright © 2008 Prentice Hall All rights reserved 11-4 E11-18: Flexible Budget Logiclik Monthly Flexible Budget Per Unit Output Units (Mouse Pads) 40,000 50,000 70,000 Sales revenue$11.00 Variable expenses$ 5.00 Fixed expenses 200, ,000 Total expenses Operating income $440,000$550,000$770, ,000250,000350, ,000450,000600,000 $40,000$100,000$170,000

Copyright © 2008 Prentice Hall All rights reserved 11-5 E11-19: Graph Flexible Budget Costs Fixed Variable

Copyright © 2008 Prentice Hall All rights reserved 11-6 Objective 2 Use sales volume variance and flexible budget variance to explain why actual results differ from the master budget

Copyright © 2008 Prentice Hall All rights reserved 11-7 Static Budget Variances Sales Volume VarianceFlexible Budget Variance Actual Results Flexible Budget based on actual number of outputs Static Budget based on expected number of outputs Static Budget Variance

Copyright © 2008 Prentice Hall All rights reserved 11-8 Sales Volume Variance Static Budget (for the # units expected to be sold) minus Flexible Budget (for the # units actually sold)

Copyright © 2008 Prentice Hall All rights reserved 11-9 Flexible Budget Variance Flexible Budget (for the # units actually sold) minus Actual Results

Copyright © 2008 Prentice Hall All rights reserved E11-22: Compute Sales Volume and Flexible Budget Variances Manion Industries Income Statement Performance Report (in thousands) Year 20X7 Act. Results at Act Prices Flex Bud Variance Flex Bud- Act # Units Sales Volume Variance Static Budget Output units Sales rev. Variable exp. Fixed exp. Total exp. Op. income $1,160$1,120$1, $441$412$588 $40 U$210 F 5 U F14 U U 11 F34 U $29 U$176 F

Copyright © 2008 Prentice Hall All rights reserved E11-22: Compute Sales Volume and Flexible Budget Variances Manion Industries Income Statement Performance Report (in thousands) Year 20X7 Act. Results at Act Prices Flex Bud Variance Flex Bud- Act # Units Sales Volume Variance Static Budget Op. income $441 $412 $588 $29 U$176 F Static Budget Variance $147,000 F

Copyright © 2008 Prentice Hall All rights reserved Objective 3 Identify the benefits of standard costs and learn how to set standards

Copyright © 2008 Prentice Hall All rights reserved Standard Costs Budget for a Single Unit Quantity Standard Price Standard

Copyright © 2008 Prentice Hall All rights reserved 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

Copyright © 2008 Prentice Hall All rights reserved 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

Copyright © 2008 Prentice Hall All rights reserved 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

Copyright © 2008 Prentice Hall All rights reserved Objective 4 Compute standard cost variances for direct materials and direct labor

Copyright © 2008 Prentice Hall All rights reserved Variance Components Efficiency VariancePrice Variance Actual Price X Actual Quantity Standard Price X Actual Quantity Standard Price X Standard Quantity Total Cost Variance

Copyright © 2008 Prentice Hall All rights reserved 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

Copyright © 2008 Prentice Hall All rights reserved 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

Copyright © 2008 Prentice Hall All rights reserved Variances Sales Volume VarianceFlexible Budget Variance Actual Results Flexible Budget based on actual number of outputs Static Budget based on expected number of outputs Static Budget Variance Efficiency Variance Price Variance

Copyright © 2008 Prentice Hall All rights reserved E11-27: Calculate Materials and Labor Variances Total Cost Variance for Direct Materials: Static budget $1.10 x 7’ x 200,000 fenders$1,540,000 Actual cost $1.05 x ?1,522,500 $17,500 F Hint: What is the correct quantity to use to compute Actual Cost of Materials in this variance?

Copyright © 2008 Prentice Hall All rights reserved E11-27: Calculate Materials Price Variance Materials price variance: Actual Quantity = 1,450,000 feet Actual Price = $1.05 Standard Price = $1.10 (Actual Price – Standard Price) x Actual Quantity ($ $1.10) x 1,450,000 feet = $72,500 F

Copyright © 2008 Prentice Hall All rights reserved 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

Copyright © 2008 Prentice Hall All rights reserved E11-27: Calculate 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 Hint: What is the correct quantity of hours to use in computing the cost variance for direct labor?

Copyright © 2008 Prentice Hall All rights reserved 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

Copyright © 2008 Prentice Hall All rights reserved 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

Copyright © 2008 Prentice Hall All rights reserved Objective 5 Compute manufacturing overhead variances

Copyright © 2008 Prentice Hall All rights reserved Total Overhead Variance Manufacturing Overhead Variance Actual Overhead Cost Standard Overhead Allocated to Production

Copyright © 2008 Prentice Hall All rights reserved Allocating Overhead in a Standard Cost System Predetermined overhead rate x Standard quantity of allocation base allowed for actual outputs

Copyright © 2008 Prentice Hall All rights reserved E11-30: Compute Manufacturing Overhead Variance Manufacturing overhead variance: Standard overhead costs: 33,000 gallons x $? $49,500 Actual overhead costs: $16,200 + $32,500 48,700 $800 F Hint: What is the correct rate to use for computing standard overhead costs?

Copyright © 2008 Prentice Hall All rights reserved Production Volume Variance Overhead Flexible Budget Variance Total Overhead Variance Manufacturing Overhead Variance Actual overhead cost Standard overhead cost Flexible budget overhead for actual outputs

Copyright © 2008 Prentice Hall All rights reserved Manufacturing Overhead Variances Overhead flexible budget variance – how well managers controlled overhead costs Production volume variance - when actual production differs from expected production

Copyright © 2008 Prentice Hall All rights reserved E11-30: Compute Flexible Budget Variance Overhead flexible budget variance: Actual overhead cost$48,700 Flexible budget overhead ($.50 x 33,000) + $30,00046,500 Total overhead flexible budget variance$2,200 U

Copyright © 2008 Prentice Hall All rights reserved E11-30: Compute the Production Volume Variance Production volume variance: Flexible budget overhead$46,500 Standard overhead allocated to actual production (33,000 x $1.50)49,500 Total production volume variance$3,000 F

Copyright © 2008 Prentice Hall All rights reserved Objective 6 (Appendix) Record transactions at standard cost and prepare a standard cost income statement

Copyright © 2008 Prentice Hall All rights reserved 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

Copyright © 2008 Prentice Hall All rights reserved E11-37: Record Materials and Labor Transactions using Standard Cost Accounting GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Materials inventory (1,450,000 x $1.10)1,595,000 Direct materials price variance72,500 Accounts payable (1,450,000 x $1.05)1,522,500

Copyright © 2008 Prentice Hall All rights reserved E11-37: Record Materials and Labor Transactions GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory (1,400,000 x $1.10)1,540,000 Direct materials efficiency variance55,000 Materials inventory (1,450,000 x $1.10)1,595,000

Copyright © 2008 Prentice Hall All rights reserved E11-37: Record Materials and Labor Transactions GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Manufacturing wages (4,500 x $13)58,500 Direct labor price variance4,500 Wages payable (4,500 x $14)63,000

Copyright © 2008 Prentice Hall All rights reserved E11-37: Record Materials and Labor Transactions GENERAL JOURNAL DATEDESCRIPTION REF DEBITCREDIT Work in process inventory (5,000 x $13)65,000 Direct labor efficiency variance6,500 Manufacturing Wages (4,500 x $13)58,500

Copyright © 2008 Prentice Hall All rights reserved E11-39 – Prepare a Standard Cost Income Statement Western Outfitters, Inc. Standard Cost Income Statement For the Month Ended April 30 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 variance4,000 Direct labor efficiency variance(2,000) Overhead flexible budget variance3,500 Production volume variance (8,000) Total manufacturing variances (10,500) Cost of goods sold at actual cost 331,500 Gross profit $228,500

Copyright © 2008 Prentice Hall All rights reserved End of Chapter 11