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

2. Flexible Budgets and Standard Costing
Chapter 8
Flexible Budgets and Standard Costing

3. Conceptual Learning Objectives
C1: Define standard costs and explain how standard cost information is useful for management by exception .
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4. Analytical Learning Objectives
A1: Analyze changes in sales from
expected amounts.
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5. 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.
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6. 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.
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7. 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.
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8. 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
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9. 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.
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10. Setting Direct Material Standards
Price Standards
Quantity Standards
Use product design specifications.
Use competitive bids for the quality and quantity desired.
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11. Setting Direct Labor Standards
Time Standards
Rate Standards
Use time and motion studies for each labor operation.
Use wage surveys and labor contracts.
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12. 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.
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13. 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
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14. Variance Analysis Begin Take corrective actions Identify questionsP2
Take corrective actions
Identify questions
Receive explanations
Conduct next period’s operations
Analyze variances
Prepare standard cost performance report
Begin
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15. 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
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16. Labor Variances Unfavorable Efficiency Variance Poorly trained workers
Poor supervision of workers
Poor quality materials
Poorly maintained equipment
Unfavorable Efficiency Variance
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17. Setting Overhead StandardsP3
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.
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18. Overhead Variance AnalysisP3
Total Overhead Variance
Variable Overhead
Fixed Overhead
Spending Variance
Efficiency Variance
Spending Variance
Volume Variance
Controllable Variance
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19. End of Chapter 8
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