Title: Flexible Budgets and Standard Costs
1Flexible Budgets andStandard Costs
2Objective 1
- Prepare a flexible budget
- for the income statement.
3Static versus Flexible Budgets
Oasis Pools Comparison of Actual Results with
Static Budget For the Month Ended May 31, 2002
Actual Static Results
Budget Variance Pools
10 8 2
F Revenues 150,000 120,000 30,000
F Expenses 119,000 95,000 24,000
U Income 31,000 25,000 6,000 F
4Static versus Flexible Budgets
Static Budget
(8 Pools)
Expected Output Volume Only
5Static versus Flexible Budgets
Flexible Budget
(5 Pools)
(8 Pools)
(10 Pools)
Range of Output Volumes
6Flexible Budgets
Budgeted sales price per pool is
15,000. Budgeted variable expenses per pool are
10,375. Total budgeted fixed cost is 12,000.
What are the flexible budgets for Oasis
Pools when expected volume is 5, 8, and 10 pools?
7Flexible Budgets
Oasis Pools Flexible Budgets
Units 5 8 10 Sales
revenue 75,000 120,000 150,000 Variable
expenses 51,875 83,000 103,750 Fixed
expenses 12,000 12,000
12,000 Operating income 11,125 25,000
34,250
8Graphing the FlexibleBudget Formula
Total cost line
115,750
95,000
Variable cost 10,375 per pool installed
63,875
Fixed cost 12,000 per month
12,000
9Graphing the FlexibleBudget Formula
The flexible budget graph shows budgeted expenses
for 10 pools.
Variable expenses 103,750 Fixed expenses
12,000 Total expenses 115,750
May actual expenses were 119,000. They exceeded
the budgeted by 3,250.
10Objective 2
- Prepare an income statement
- performance report.
11Oasis Pools Performance Report
Actual Flexible Static
Results Budget Budget Pools
10 10 8 Revenues 150,
000 150,000 120,000 Variable expenses
105,000 103,750 83,000 Fixed expenses
14,000 12,000 12,000 Total
expenses 119,000 115,750
95,000 Income 31,000 34,250 25,000
12Oasis Pools Performance Report
Actual Results 31,000
Static Budget 25,000
Flexible Budget 34,250
3,250 U
9,250 F
Flexible Budget Variance
Sales Volume Variance
13Oasis Pools Performance Report
Actual Results 31,000
Static Budget 25,000
6,000 U
Static Budget Variance
14The Flexible Budgetand Variance Analysis
- The flexible budget variance is the difference
between what the company spent at the actual
level of output and what it should have spent to
obtain the actual level of output. - It highlights the difference between actual costs
and flexible budget costs.
15The Flexible Budgetand Variance Analysis
- Oasis Pools actually incurred 105,000 of
variable costs to install the 10 pools. - This was 1,250 more than the 103,750 budgeted
variable cost for 10 pools. - Oasis Pools also spent 2,000 more than budgeted
on fixed expenses (14,000 12,000).
16Objective 3
- Identify the benefits
- of standard costs.
17Benefits of Standard Costs
- Standard costs are carefully predetermined costs.
- They help managers plan by providing the unit
amounts, which are the building blocks of
budgeting. - They help simplify record keeping.
- Standard quantity often is referred to as the
quantity that should have been used.
18Objective 4
- Compute standard cost variances
- for direct materials and direct labor.
19Direct Material andDirect Labor Variances
- Price, or rate, which measures how well the
business keeps unit prices of materials and labor
within standards. - Efficiency, or quantity, which measures whether
the quantity of materials or labor used to make
the actual number of outputs is within the
budget.
20Price Variance...
- is the difference between the actual price and
standard price of inputs used multiplied by the
actual quantity of inputs. - Price variance (Actual quantity Actual price)
(Actual quantity Standard price) or... - Actual quantity (AP SP)
21Efficiency Variance...
- is the difference between the actual and standard
quantity of inputs allowed multiplied by the
standard price of input. - Efficiency variance (Actual quantity Standard
price) (Standard quantity Standard price)
or... - Standard price (AQ SQ)
22Example of Standard Costing
Variance analysis begins with a total variance
to be explained in this example, 3,250.
Actual variable expenses 105,000 Flexible
budget 103,750 Difference 1,250
Actual fixed expenses were 2,000 more than
budgeted.
23Materials Variances
Standards
Direct materials cost was 3,575 per cubic
foot. SQ of materials allowed (gunite) was 1,000
cubic feet per pool.
Actual Results (10 pools were built)
AP paid per cubic foot 3.00 AQ of materials
used 12,000 cubic feet
24Materials Variances
Price variance 12,000(3.00 3.575) 6,900
favorable
Efficiency variance 3.575(12,000 10,000)
7,150 unfavorable
Flexible budget variance 6,900 7,150 250
unfavorable
25Materials Variances
- Actual cost incurred (Actual inputs Actual
price) 12,000 3 36,000 - Standard cost of actual inputs (Actual inputs
Standard price) 12,000 3.575 42,900 - Flexible budget (Standard inputs Standard
price) 10,000 3.575 35,750
26Labor Variances
Standards
Direct labor cost was 6,000 per pool. SP (rate)
was 15 per hour. Standard hours per pool was 400.
Actual Results (10 pools were built)
AP (actual rate) was 16.10 per hour. AQ (actual
hours) was 3,800.
27Labor Variances
Price (or rate) variance 3,800(16.10 15.00)
4,180 unfavorable
Efficiency variance 15.00(3,800 4,000)
3,000 favorable
Flexible budget variance 4,180 3,000
1,180 unfavorable
28Labor Variances
- Actual cost incurred (Actual inputs Actual
price) 3,800 16.10 61,180 - Standard cost of actual inputs (Actual inputs
Standard price) 3,800 15 57,000 - Flexible budget (Standard inputs Standard
price) 4,000 15 60,000
29Flexible Budget Variancesfor Materials and Labor
Flexible budget variance for materials 250
U Flexible budget variance for labor 1,180
U Total variances 1,430 U
Total flexible budget variance 3,250
U Materials and labor variances 1,430
U Flexible budget overhead variances 1,820 U
30Objective 5
- Analyze manufacturing overhead
- in a standard cost system.
31Manufacturing Overhead Variances
- The flexible budget variance for manufacturing
overhead shows whether managers are keeping total
overhead costs within the budgeted amount for the
actual production of the period. - The production volume variance arises when actual
production differs from the level in the static
budget.
32Allocating Overhead to Production
- Oasis Pools allocates manufacturing overhead to
production based on standard direct labor hours
for the actual number of outputs. - The static budget, which is based on expected
output of 8 pools, is known at the beginning of
the period.
33Allocating Overhead to Production
Standards
Variable overhead cost was 800 per
pool. Standard hours per pool were 400. Fixed
overhead cost was 12,000.
Actual Results (10 pools were built)
Actual variable overhead was 7,820. Actual hours
were 3,800, fixed overhead was 14,000, and total
overhead was 21,820.
34Allocating Overhead to Production
- In a standard cost system, manufacturing overhead
is allocated to production based on a
predetermined overhead rate. - Most companies base their predetermined overhead
rates on amounts from the static (master) budget
which is known at the beginning of the year.
35Allocating Overhead to Production
Oasis Pools Budget Data for the Month Ended May
30, 2002
Budget type Static
Flexible Pools 8
10 Standard direct labor hours 3,200
4,000 Overhead cost Variable 6,400
8,000 Fixed 12,000
12,000 Total 18,400 20,000
36Allocating Overhead to Production
Standard variable overhead rate per hour 6,400
3,200 2.00
Standard fixed overhead rate per hour 12,000
3,200 3.75
37Total ManufacturingOverhead Variance...
- is the amount of underallocated or overallocated
manufacturing overhead. - This is the difference between actual
manufacturing overhead and allocated
manufacturing overhead.
38Total ManufacturingOverhead Variance
How much standard overhead is allocated to
production?
4,000 2.00 8,000 variable 4,000
3.75 15,000 fixed Total 23,000
Total manufacturing overhead cost
variance 23,000 21,820 1,180 favorable
39Total ManufacturingOverhead Variance
- The total manufacturing overhead variance is
split into the manufacturing flexible budget
variance and the production volume variance. - Flexible budget overhead for actual production
12,000 (4,000 2) 20,000.
40Overhead Flexible Budget Variance
Oasis Pools a comparison of actual results
with the flexible budget overhead for actual
production
Actual Results Flexible Budget
Variance Pools 10 10 Overhead
cost Variable 7,820 8,000 180
F Fixed 14,000 12,000 2,000
U Total 21,820 20,000 1,820 U
Overhead flexible variance is 1,820 unfavorable.
41Variable Overhead Variances
- Actual cost incurred
(Actual inputs Actual price) 7,820 - Standard cost of actual inputs
(Actual inputs Standard price) 7,600 - Flexible budget
(Standard inputs Standard price) 8,000
42Production Volume Variance...
- is the difference between the fixed overhead cost
in the flexible budget for actual production and
the standard fixed overhead allocated to
production. - 4,000 3.75 15,000 allocated
- How much is the volume variance?
- 12,000 15,000 3,000 favorable volume
variance
43Total Overhead Variances
Flexible budget variance 1,820 U Volume
variance 3,000 F Total 1,180 F
44Flexible Budget Variance
Flexible budget variance 3,250 U
Materials 250 U Labor 1,180
U Flexible budget for overhead 1,820
U Total 3,250 U
45Total Variances
- Why was actual income 3,250 less than the
flexible budget for 10 pools? - Variable costs exceeded the flexible budget by
1,250 and actual fixed costs exceeded the static
budget by 2,000.
46Objective 6
- Record transactions
- at standard cost.
47Standard Costs in the Accounts
What is the entry to record the purchase of
12,000 cubic feet of materials (actual price paid
was 3.00 per cubic foot and the standard being
3.575/cubic foot)?
Materials Inventory 42,900 Direct Materials
Price Variance 6,900 Accounts
Payable 36,000 To record purchases of
direct materials
48Standard Costs in the Accounts
What is the entry to record the transfer
of 12,000 actual cubic feet of materials to work
in process inventory?
Work in Process Inventory 35,750 Direct
Materials Efficiency Variance
7,150 Materials Inventory 42,900 To record
use of materials 10,000 SQ 3.575 SP
49Standard Costs in the Accounts
- Notice that in these entries direct materials
price variance is recorded at the time of
purchase. - An unfavorable variance has a debit balance which
increases the expense. - A favorable variance has a credit balance in the
accounts and is a reduction in expenses.
50Standard Costs in the Accounts
- Manufacturing Overhead 21,820
- Accounts Payable,
- Accumulated Depreciation,
- and Other accounts 21,820
- To record actual overhead costs incurred
51Standard Costs in the Accounts
What is the entry to record allocated manufacturin
g overhead?
Work in Process Inventory 23,000 Manufacturing
Overhead 23,000 To allocate overhead
52Other Entries
Finished Goods Inventory 118,750 Work in
Process Inventory 118,750 To record completion
of 10 pools
Cost of Goods Sold 118,750 Finished Goods
Inventory 118,750 To record sale of 10 pools
53Closing Variances
Unfavorable Variances
Materials efficiency 7,150 Labor rate
4,180 Flexible budget 1,820 Total 13,
150
Favorable Variances
Materials price 6,900 Labor efficiency
3,000 Production volume 3,000 Total 12
,900
54Closing Variances
13,150 unfavorable 12,900 favorable 250
unfavorable
Income Summary 250 Net Variance 250 To
close various variances
This entry increases the cost of goods sold.
55Objective 7
- Prepare a standard cost
- income statement
- for management.
56Standard Cost Income Statement for Management
Standard Costing Revenues 150,000 Cost
of goods sold 118,750 Unadjusted income
31,250
Actual Costing Revenues 150,000 Cost
of goods sold 119,000 Unadjusted income
31,000
57Standard Cost Income Statement for Management
- Closing the 250 net unfavorable variance to
income summary increases the cost of goods sold
to 119,000. - This produces the 31,000 income figure.
58End of Chapter 24