Copyright © 2007 Prentice-Hall. All rights reserved 1 Flexible Budgets and Standard Costs Chapter 11
Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Prepare a flexible budget for the income statement
Copyright © 2007 Prentice-Hall. All rights reserved 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 © 2007 Prentice-Hall. All rights reserved 4 Flexible Budget – E11-17 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 © 2007 Prentice-Hall. All rights reserved 5 E11-18 Fixed Variable
Copyright © 2007 Prentice-Hall. All rights reserved 6 Objective 2 Use the flexible budget to show why actual results differ from the static budget
Copyright © 2007 Prentice-Hall. All rights reserved 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 © 2007 Prentice-Hall. All rights reserved 8 Sales Volume Variance Static Budget (for the # units expected to be sold) - Flexible Budget (for the # units actually sold)
Copyright © 2007 Prentice-Hall. All rights reserved 9 Flexible Budget Variance Flexible Budget (for the # units actually sold) - Actual Results
Copyright © 2007 Prentice-Hall. All rights reserved 10 E11-20 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 © 2007 Prentice-Hall. All rights reserved 11 E11-20 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 © 2007 Prentice-Hall. All rights reserved 12 Objective 3 Identify the benefits of standard costs and learn how to set standards
Copyright © 2007 Prentice-Hall. All rights reserved 13 Standard Costs Budget for a single unit Price standards Quantity standards
Copyright © 2007 Prentice-Hall. All rights reserved 14 Price Standards 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 © 2007 Prentice-Hall. All rights reserved 15 Quantity Standards 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 © 2007 Prentice-Hall. All rights reserved 16 Benefits of Standard Costs Helps managers In budget preparation Target levels of performance Identify performance standards Set sales prices Decrease accounting costs
Copyright © 2007 Prentice-Hall. All rights reserved 17 Variances Efficiency VariancePrice Variance Actual Price X Actual Quantity Standard Price X Actual Quantity Standard Price X Standard Quantity Total Cost Variance
Copyright © 2007 Prentice-Hall. All rights reserved 18 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 © 2007 Prentice-Hall. All rights reserved 19 Efficiency Variance Efficiency - 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 © 2007 Prentice-Hall. All rights reserved 20 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 © 2007 Prentice-Hall. All rights reserved 21 Objective 4 Compute standard cost variances for direct materials and direct labor
Copyright © 2007 Prentice-Hall. All rights reserved 22 E11-22 Total Cost Variance for Direct Materials: Static budget $1.10 x 7’ x 200,000 fenders$1,540,000 Actual cost $1.05 x 1,450,0001,522,500 $17,500 F
Copyright © 2007 Prentice-Hall. All rights reserved 23 E11-22 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 © 2007 Prentice-Hall. All rights reserved 24 E11-22 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 © 2007 Prentice-Hall. All rights reserved 25 E11-22 Total Cost Variance for Direct Labor: Static budget $13 x.025 hrs x 200,000 fenders$65,000 Actual cost $14 x 4,50063,000 $2,000 F
Copyright © 2007 Prentice-Hall. All rights reserved 26 E11-22 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 © 2007 Prentice-Hall. All rights reserved 27 E11-22 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 © 2007 Prentice-Hall. All rights reserved 28 Objective 5 Analyze manufacturing overhead in a standard cost system
Copyright © 2007 Prentice-Hall. All rights reserved 29 Total Overhead Variance Manufacturing Overhead Variance Actual Overhead Cost Standard Overhead Cost
Copyright © 2007 Prentice-Hall. All rights reserved 30 Allocating Overhead in a Standard Cost System Predetermined overhead rate x Standard quantity of allocation base allowed for actual outputs
Copyright © 2007 Prentice-Hall. All rights reserved 31 E11-25 Manufacturing overhead variance: Standard overhead costs: 33,000 gallons x $1.50 $49,500 Actual overhead costs: $16,200 + $32,500 48,700 $800 F
Copyright © 2007 Prentice-Hall. All rights reserved 32 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 © 2007 Prentice-Hall. All rights reserved 33 Manufacturing Overhead Variances Overhead flexible budget variance – how well managers controlled overhead costs Production volume variance - when actual production differs from expected production
Copyright © 2007 Prentice-Hall. All rights reserved 34 E11-25 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 © 2007 Prentice-Hall. All rights reserved 35 E11-23 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 © 2007 Prentice-Hall. All rights reserved 36 Objective 6 Record transactions at standard cost and prepare a standard cost income statement
Copyright © 2007 Prentice-Hall. All rights reserved 37 Standard Cost Accounting System 1.Each variance has GL account Debit balance – unfavorable Credit balance – favorable
Copyright © 2007 Prentice-Hall. All rights reserved 38 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 © 2007 Prentice-Hall. All rights reserved 39 E11-23 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 © 2007 Prentice-Hall. All rights reserved 40 E11-23 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 © 2007 Prentice-Hall. All rights reserved 41 E11-23 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 © 2007 Prentice-Hall. All rights reserved 42 E11-23 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 © 2007 Prentice-Hall. All rights reserved 43 E11-26 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 © 2007 Prentice-Hall. All rights reserved 44 End of Chapter 11