24 - 1©2002 prentice hall, inc. business publishing accounting, 5/e horngren/harrison/bamber...

24 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

Flexible Budgets and

Standard CostsChapter

24


Objective 1

Prepare a flexible budgetfor the income

statement.


Oasis PoolsComparison of Actual Results with Static Budget

For the Month Ended May 31, 2002

Actual Static Results Budget Variance

Pools 10 8 2 FRevenues $150,000 $120,000 $30,000 FExpenses 119,000 95,000 $24,000 UIncome $ 31,000 $ 25,000 $ 6,000 F

Static versus Flexible Budgets



Expected Output Volume Only

Static Budget

(8 Pools)



Range of Output Volumes

Flexible Budget

(5 Pools) (8 Pools) (10 Pools)


Flexible Budgets

What are the flexible budgets for Oasis Poolswhen expected volume is 5, 8, and 10 pools?

Budgeted sales price per pool is $15,000.Budgeted variable expenses per pool are $10,375.

Total budgeted fixed cost is $12,000.


Flexible Budgets

Oasis Pools Flexible Budgets

Units 5 8 10Sales revenue $75,000 $120,000 $150,000Variable expenses 51,875 83,000 103,750Fixed expenses 12,000 12,000 12,000Operating income $11,125 $ 25,000 $ 34,250


Graphing the FlexibleBudget Formula

$0

$130,000

0 5 8 10

Number of Swimming Pools Installed

Tot

al E

xpen

ses

$115,750

$95,000

$63,875

$12,000

Variable cost$10,375per poolinstalled

Fixed cost$12,000

per month

Total cost line


Graphing the FlexibleBudget Formula

The flexible budget graph showsbudgeted expenses for 10 pools.

Variable expenses $103,750Fixed expenses 12,000Total expenses $115,750

May actual expenses were $119,000.They exceeded the budgeted by $3,250.


Objective 2

Prepare an income statement

performance report.


Oasis Pools Performance Report

Actual Flexible Static Results Budget Budget

Pools 10 10 8Revenues $150,000 $150,000 $120,000Variable expenses 105,000 103,750 83,000Fixed expenses 14,000 12,000 12,000Total expenses 119,000 115,750 95,000Income $ 31,000 $ 34,250 $ 25,000



Flexible Budget Variance Sales Volume Variance

ActualResults$31,000

StaticBudget$25,000

FlexibleBudget$34,250

$3,250 U $9,250 F



Static Budget Variance

ActualResults$31,000

StaticBudget$25,000

$6,000 U


The 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.


The 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).


Objective 3

Identify the benefits

of standard costs.


Benefits 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.


Objective 4

Compute standard cost variancesfor direct materials and direct

labor.


Direct Material andDirect Labor Variances

1 Price, or rate, which measures how well the business keeps unit prices of materials and labor within standards.

2 Efficiency, or quantity, which measures whether the quantity of materials or labor used to make the actual number of outputs is within the budget.


Price 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)


Efficiency 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)


Variance analysis begins with a total variance to be explained – in this example, $3,250.

Actual variable expenses $105,000Flexible budget –103,750 Difference 1,250

Actual fixed expenses were $2,000more than budgeted.

Example of Standard Costing


Materials Variances

Direct materials cost was $3,575 per cubic foot.SQ of materials allowed (gunite)

was 1,000 cubic feet per pool.

Standards

Actual Results (10 pools were built)

AP paid per cubic foot = $3.00AQ of materials used = 12,000 cubic feet


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

Materials Variances


Materials 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


Labor Variances

Standards


Direct labor cost was $6,000 per pool.SP (rate) was $15 per hour.

Standard hours per pool was 400.

AP (actual rate) was $16.10 per hour.AQ (actual hours) was 3,800.


Labor 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


Labor 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


Flexible Budget Variancesfor Materials and Labor

Flexible budget variance for materials $ 250 UFlexible budget variance for labor 1,180 UTotal variances $1,430 U

Total flexible budget variance $3,250 UMaterials and labor variances 1,430 UFlexible budget overhead variances $1,820 U


Objective 5

Analyze manufacturing overhead

in a standard cost system.


Manufacturing 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.


Allocating 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.



Standards


Variable overhead cost was $800 per pool.Standard hours per pool were 400.Fixed overhead cost was $12,000.

Actual variable overhead was $7,820.Actual hours were 3,800, fixed overhead was

$14,000, and total overhead was $21,820.



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.



Oasis PoolsBudget Data for the Month Ended May 30, 2002

Budget type Static FlexiblePools 8 10Standard direct labor hours 3,200 4,000Overhead cost:

Variable $ 6,400 $ 8,000Fixed 12,000 12,000

Total $18,400 $20,000



Standard variable overhead rate per hour:$6,400 ÷ 3,200 = $2.00

Standard fixed overhead rate per hour:$12,000 ÷ 3,200 = $3.75


Total ManufacturingOverhead Variance...

– is the amount of underallocated or overallocated manufacturing overhead.

This is the difference between actual manufacturing overhead and allocated manufacturing overhead.


Total ManufacturingOverhead Variance

How much standard overhead is allocated to production?

4,000 × $2.00 $ 8,000 variable4,000 × $3.75 15,000 fixedTotal $23,000

Total manufacturing overhead cost variance:$23,000 – $21,820 = $1,180 favorable


Total 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.


Overhead Flexible Budget Variance

Oasis Pools – a comparison of actual results withthe flexible budget overhead for actual production:

Actual Results Flexible Budget Variance

Pools 10 10Overhead cost:Variable $ 7,820 $ 8,000 $ 180 FFixed 14,000 12,000 $2,000 UTotal $21,820 $20,000 $1,820 U

Overhead flexible variance is $1,820 unfavorable.


Variable 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


Production 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


Flexible budget variance $1,820 UVolume variance 3,000 FTotal $1,180 F

Total Overhead Variances


Flexible Budget Variance

Flexible budget variance: $3,250 U

Materials $ 250 ULabor 1,180 UFlexible budget for overhead 1,820 UTotal $3,250 U


Total 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.


Record transactions

at standard cost.

Objective 6


What is the entry to record the purchaseof 12,000 cubic feet of materials (actualprice paid was $3.00 per cubic foot andthe standard being $3.575/cubic foot)?

Standard Costs in the Accounts

Materials Inventory 42,900Direct Materials Price Variance 6,900Accounts Payable 36,000To record purchases of direct materials


What is the entry to record the transfer of12,000 actual cubic feet of materials to

work in process inventory?


Work in Process Inventory 35,750*Direct MaterialsEfficiency Variance 7,150Materials Inventory 42,900To record use of materials*10,000 SQ × $3.575 SP



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.



Manufacturing Overhead 21,820 Accounts Payable, Accumulated Depreciation, and Other accounts

21,820To record actual overhead costs incurred



What is the entry to record allocatedmanufacturing overhead?

Work in Process Inventory 23,000Manufacturing Overhead 23,000

To allocate overhead


Other Entries

Finished Goods Inventory 118,750Work in Process Inventory 118,750

To record completion of 10 pools

Cost of Goods Sold 118,750Finished Goods Inventory 118,750

To record sale of 10 pools


Closing Variances

Unfavorable Variances

Favorable VariancesMaterials price $ 6,900Labor efficiency 3,000Production volume 3,000Total $12,900

Materials efficiency $ 7,150Labor rate 4,180Flexible budget 1,820Total $13,150


Closing Variances

$13,150 unfavorable – $12,900 favorable= $250 unfavorable

Income Summary 250Net Variance 250

To close various variances

This entry increases the cost of goods sold.


Prepare a standard cost

income statementfor management.

Objective 7


Standard Cost Income Statement for Management

Standard CostingRevenues $150,000Cost of goods sold 118,750Unadjusted income $ 31,250

Actual CostingRevenues $150,000Cost of goods sold 119,000Unadjusted income $ 31,000


Standard 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.


End of Chapter 24

24 - 1©2002 prentice hall, inc. business publishing accounting, 5/e horngren/harrison/bamber...

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