accounting chapter 23

Flexible Budgets and StandardCost Systems

Chapter 23

23-1Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

Learning Objectives

1. Prepare flexible budgets and performance reports using static and flexible budgets

2. Identify the benefits of a standard cost system and understand how standards are set


Learning Objectives

3. Compute the standard cost variances for direct materials and direct labor

4. Compute the standard cost variances for manufacturing overhead


Learning Objectives

5. Describe the relationship among and responsibility for the product cost variances

6. Record transactions in a standard cost system and prepare a standard cost income statement


Learning Objective 1

Prepare flexible Prepare flexible budgets and budgets and

performance reports performance reports using static and using static and flexible budgetsflexible budgets


Budgeting Objectives

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 23-6

Budget Variance

The difference between:

•Actual amount

•Budgeted amount


Static Budget Performance Report


Favorable versus Unfavorable Variances

• Favorable (F) if an actual amount increases operating income

– Actual revenue > Budgeted revenue

– Actual expense < Budgeted expense

• Unfavorable (U) if an actual amount decreases operating income

– Actual revenue < Budgeted revenue

– Actual expense > Budgeted expense


Static Budget Performance Report


Information Needed toCreate a Flexible Budget

• Budgeted selling price per unit• Variable cost per unit

– Product Costs• Direct materials• Direct labor• Variable manufacturing overhead

– Variable selling and administrative expenses• Total fixed costs

– Fixed manufacturing overhead– Fixed selling and administrative expenses

• Different volume levels within the relevant range


Flexible Budget


Budget Variances


Exhibit 23-4 Budget VariancesExhibit 23-4 Budget Variances

Flexible Budget Variance Sales Volume Variance

Static Budget Variance

Flexible BudgetBased on actual

number of units sold

Static BudgetBased on expectednumber of units sold

Actual Results

Variance Formulas

Flexible Budget Variance = Actual Results − Flexible Budget(based on 52,000 units sold) (based on 52,000 units sold)

Sales Volume Variance = Flexible Budget − Static Budget(based on 52,000 units sold) (based on 50,000 units sold)


Flexible Budget Performance Report


Sales Volume Variance$ 3,250 F

Flexible Budget Variance$ 680 U

Static Budget Variance$ 2,570 F

1. Garland Company expects to sell 600 wreaths in December 2014, but wants to plan for 100 more and 100 less than expected. The wreaths sell for $5.00 each and have variable costs of $2.00 each. Fixed costs are expected to be $500 for the month. Prepare a flexible budget for 500, 600, and 700 wreaths.



Identify the benefits of Identify the benefits of a standard cost system a standard cost system

and understand how and understand how standards are setstandards are set


Standards

Set standards for

•Cost

•Efficiency (amount)


Standard Setting Issues


Cheerful Colors’Standard Cost Calculations

Exhibit 23-7 Standard Cost Calculations

Direct materials cost standard for paraffin:Purchase price, net of discounts $ 1.65 per poundDelivery, receiving, and inspection 0.10 per poundTotal standard cost per pound of paraffin $ 1. 75 per pound

Direct labor cost standard:Hourly wage $ 10.00 per direct labor hourPayroll taxes and fringe benefits 2.00 per direct labor hourTotal standard cost per direct labor hour $ 12.00 per direct labor hour

Variable overhead cost standard: Estimated variable overhead cost = $ 37,500Estimated quantity of allocation base 12,500 direct labor hours

= $ 3.00 per direct labor hour

Fixed overhead cost standard: Estimated fixed overhead cost = $ 25,000Estimated quantity of allocation base 12,500 direct labor hours


Exhibit 23-7 Standard Cost Calculations

Direct materials cost standard for paraffin:Purchase price, net of discounts $ 1.65 per poundDelivery, receiving, and inspection 0.10 per poundTotal standard cost per pound of paraffin $ 1. 75 per pound

Direct labor cost standard:Hourly wage $ 10.00 per direct labor hourPayroll taxes and fringe benefits 2.00 per direct labor hourTotal standard cost per direct labor hour $ 12.00 per direct labor hour

Variable overhead cost standard: Estimated variable overhead cost = $ 37,500Estimated quantity of allocation base 12,500 direct labor hours


Fixed overhead cost standard: Estimated fixed overhead cost = $ 25,000Estimated quantity of allocation base 12,500 direct labor hours



Cheerful Colors’Efficiency Standards


Standard Cost System Benefits

Standard costing helps managers:

•Prepare the master budget

•Set target levels of performance for flexible budgets

•Identify performance standards

•Set sales prices of products and services

•Decrease accounting costs


Cost and Efficiency Variances


Exhibit 23-8 Cost and Efficiency VariancesExhibit 23-8 Cost and Efficiency Variances

Actual Quantity Standard Quantity AllowedActual Quantity

Standard Cost Standard CostActual Cost

Cost Variance Efficiency Variance

Total Product Cost Variance

× × ×

Cost Variance Formula

Cost Variance = (Actual Cost × Actual Quantity) − (Standard Cost × Actual Quantity)

= (Actual Cost − Standard Cost) × Actual Quantity

= (AC − SC) × AQ


Efficiency Variance Formula

Efficiency Variance = (Standard Cost × Actual Quantity) − (Standard Cost × Standard Quantity)

= (Actual Quantity − Standard Quantity) × Standard Cost

= (AQ − SQ) × SC


Variance Relationships


Exhibit 23-9 Variance RelationshipsExhibit 23-9 Variance Relationships

CostVariance

EfficiencyVariance

Flexible Budget Variance

Sales Volume Variance

Static Budget Variance

Flexible BudgetBased on actual

number of units sold

Static BudgetBased on expectednumber of units sold

Actual Results


Match the definitions to the correct variance.

Variance Definition

2. Cost variance a. The difference between the expected results inthe flexible budget for the actual units sold and the static budget.

3. Efficiency variance b. The difference between actual results and the expected results in the flexible budget for theactual units sold.

4. Flexible budget variance c. Measures how well the business keeps unit costs of material and labor inputs within standards.

5. Sales volume variance d. The difference between actual results and the expected results in the static budget.

6. Static budget variance e. Measures how well the business uses itsmaterials or human resources.



Variance Definition







Compute the standard Compute the standard cost variances for cost variances for

direct materials and direct materials and direct labordirect labor


Flexible Budget Variancesfor Production Costs


Direct Materials Data


Direct Materials Variances

Direct Materials Cost Variance = (AC – SC) × AQ

Direct Materials Efficiency Variance = (AQ – SQ) × SC




= ($1.60 per pound − $1.75 per pound) × 65,000 pounds

= $9,750 F





= ($1.60 per pound − $1.75 per pound) × 65,000 pounds

= $9,750 F


= (65,000 pounds − 52,000 pounds) × $1.75 per pound

= $22,750 U




$1.75 per pound×

52,000 pounds

SC × SQ

$91,000

$1.60 per pound×

65,000 pounds

AC × AQ

$104,000

$1.75 per pound×

65,000 pounds

SC × AQ

$113,750

CostVariance

$9,750 F

EfficiencyVariance

$22,750 U

Total Direct Materials Variance

$13,000 U

Exhibit 23-11 Direct Materials VariancesExhibit 23-11 Direct Materials Variances

Direct Labor Data


Direct Labor Variances

Direct Labor Cost Variance = (AC – SC) × AQ

Direct Labor Efficiency Variance = (AQ – SQ) × SC




= ($14.00 per DLHr − $12.00 per DLHr) × 10,400 DLHr

= $20,800 U






= $20,800 U


= (10,400 DLHr − 13,000 DLHr) × $12.00 per DLHr

= $31,200 F




$12.00 per DLHr×

13,000 DLHr

SC × SQ

$156,000

$14.00 per DLHr×

10,400 DLHr

AC × AQ

$145,600

$12.00 per DLHr×

10,400 DLHr

SC × AQ

$124,800

CostVariance

$20,800 U

EfficiencyVariance

$31,200 F

Total Direct Labor Variance

$10,400 F

Exhibit 23-12 Direct Labor VariancesExhibit 23-12 Direct Labor Variances

Tipton Company manufactures shirts. During June, Tipton made 1,200 shirts and gathered the following additional data:Direct materials cost standard $6.00 per yard of fabric

Direct materials efficiency standard 1.50 yards per shirt

Actual amount of fabric purchased and used 1,680 yards

Actual cost of fabric purchased and used $10,500

Direct labor cost standard $15.00 per DLHr

Direct labor efficiency standard 2.00 DLHr per shirt

Actual amount of direct labor hours 2,520 DLHr

Actual cost of direct labor $36,540



Calculate the following variances:7.Direct materials cost variance

8.Direct materials efficiency variance

9.Total direct materials variance



Actual cost per yard = $10,500 yards / 1,680 yards= $6.25 per yard

Direct materials cost variance = (AC – SC) × AQ= ($6.25 per yard − $6.00 per yard) × 1,680 yards= $420 U

8.Direct materials efficiency variance






8.Direct materials efficiency varianceStandard quantity = 1.5 yards per shirt × 1,200 shirts

= 1,800 yards

Direct materials efficiency variance = (AQ – SQ) × SC= (1,680 yards − 1,800 yards) × $6.00 per yard= $720 F






8.Direct materials efficiency varianceStandard quantity = 1.5 yards per shirt × 1,200 shirts

= 1,800 yards

Direct materials efficiency variance = (AQ – SQ) × SC= (1,680 yards − 1,800 yards) × $6.00 per yard= $720 F

9.Total direct materials variance = $420 U + $720 F= $300 F


Calculate the following variances:10.Direct labor cost variance

11.Direct labor efficiency variance

12.Total direct labor variance



Actual cost per direct labor hour = $36,540 / 2,520 DLHr= $14.50 per DLHr

Direct labor cost variance = (AC – SC) × AQ= ($14.50 per DLHr − $15.00 per DLHr) × 2,520 DLHr= $1,260 F

11.Direct labor efficiency variance






11.Direct labor efficiency varianceStandard quantity = 2 DLHr per shirt × 1,200 shirts

= 2,400 DLHr

Direct labor efficiency variance = (AQ – SQ) × SC= (2,520 DLHr − 2,400 DLHr) × $15.00 per DLHr= $1,800 U






11.Direct labor efficiency varianceStandard quantity = 2 DLHr per shirt × 1,200 shirts

= 2,400 DLHr

Direct labor efficiency variance = (AQ – SQ) × SC= (2,520 DLHr − 2,400 DLHr) × $15.00 per DLHr= $1,800 U

12.Total direct labor variance = $1,260 F + $1,800 U= $540 U


Compute the standard Compute the standard cost variances for cost variances for

manufacturing manufacturing overheadoverhead


Allocating Overheadin a Standard Cost System

Overhead allocatedto production

=Standard overhead

allocation rate×

Standard quantity of the allocationbase allowed for actual output


Budgeted Allocation Base

Budgeted allocation base = 50,000 batches × 0.25 direct labor hours per batch

= 12,500 DLHr


Standard Overhead Allocation Rate

Standard overhead = Budgeted overhead costallocation rate Budgeted allocation base

= Budgeted VOH* + Budgeted FOHBudgeted allocation base Budgeted allocation base

*VOH = Variable overhead; FOH = Fixed overhead


Standard Overhead Allocation Rate

Standard overhead = Budgeted overhead costallocation rate Budgeted allocation base

= Budgeted VOH* + Budgeted FOHBudgeted allocation base Budgeted allocation base

Standard overhead = $37,500 + $25,000allocation rate 12,500 DLHr 12,500 DLHr

= $3.00 per DLHr + $2.00 per DLHr

= $5.00 per DLHr

*VOH = Variable overhead; FOH = Fixed overhead


Variable Overhead Data


Variable Overhead Variances

Variable Overhead Cost Variance = (AC – SC) × AQ

Variable Overhead Efficiency Variance = (AQ – SQ) × SC





= $1,040 F






= $1,040 F


= (10,400 DLHr − 13,000 DLHr) × $3.00 per DLHr

= $7,800 F




$3.00 per DLHr×

13,000 DLHr

SC × SQ

$39,000

$2.90 per DLHr×

10,400 DLHr

AC × AQ

$30,160

$3.00 per DLHr×

10,400 DLHr

SC × AQ

$31,200

CostVariance

$1,040 F

EfficiencyVariance

$7,800 F

Total Variable Overhead Variance

$8,840 F

Exhibit 23-13 Variable Overhead VariancesExhibit 23-13 Variable Overhead Variances

Fixed Overhead Variances

Fixed Overhead Cost Variance = Actual fixed overhead – Budgeted fixed overhead

Fixed Overhead Volume Variance = Budgeted fixed overhead – Allocated fixed overhead




= $23,920 − $25,000

= $1,080 F

Fixed Overhead Volume Variance = Budgeted fixed overhead – Allocated fixed overhead




=Standard overhead

allocation rate×





=Standard overhead

allocation rate×


= $2.00 per DLHr × (0.25 DLHr per batch × 52,000 batches)

= $2.00 per DLHr × 13,000 DLHr

= $26,000




= $23,920 − $25,000

= $1,080 F

Fixed Overhead Volume Variance = Budgeted fixed overhead – Allocated fixed overhead= $25,000 − $26,000

= $1,000 F


Fixed Overhead Volume Variance




Allocated FixedOverhead

$26,000

Actual FixedOverhead

$23,920

Budgeted FixedOverhead

$25,000

CostVariance

$1,080 F

VolumeVariance

$1,000 F

Total Fixed Overhead Variance

$2,080 F

Exhibit 23-15 Fixed Overhead VariancesExhibit 23-15 Fixed Overhead Variances

This Try It! continues the previous Try It! During June, Tipton made 1,200 shirts but had budgeted production at 1,400 shirts. The allocation base for fixed overhead is direct labor hours. Tipton gathered the following additional data:Variable overhead cost standard $0.50 per DLHr

Direct labor efficiency standard 2.00 DLHr per shirt

Actual amount of direct labor hours 2,520 DLHr

Actual cost of variable overhead $1,512

Fixed overhead cost standard $0.25 per DLHr

Budgeted fixed overhead $700

Actual cost of fixed overhead $750



Calculate the following variances:13.Variable overhead cost variance

14.Variable overhead efficiency variance

15.Total variable overhead variance


Calculate the following variances:13.Variable overhead cost varianceActual variable cost per direct labor hour= $1,512 / 2,520 DLHr

= $0.60 per DLHr

Variable overhead cost variance = (AC – SC) × AQ= ($0.60 per DLHr − $0.50 per DLHr) × 2,520 DLHr= $252 U

14.Variable overhead efficiency variance




= $0.60 per DLHr


14.Variable overhead efficiency varianceStandard quantity = 2 DLHr per shirt × 1,200 shirts

= 2,400 DLHr

Variable overhead efficiency variance = (AQ – SQ) × SC= (2,520 DLHr − 2,400 DLHr) × $0.50 per DLHr= $60 U




= $0.60 per DLHr


14.Variable overhead efficiency varianceStandard quantity = 2 DLHr per shirt × 1,200 shirts

= 2,400 DLHr

Variable overhead efficiency variance = (AQ – SQ) × SC= (2,520 DLHr − 2,400 DLHr) × $0.50 per DLHr= $60 U

15.Total variable overhead variance = $252 U + $60 U= $312 U


Calculate the following variances:16.Fixed overhead cost variance

17.Fixed overhead volume variance

18.Total fixed overhead variance



Fixed overhead cost variance = Actual fixed overhead − Budgeted fixed overhead= $750 − $700= $50 U

17.Fixed overhead volume variance





17.Fixed overhead volume varianceOverhead allocated = Standard overhead × Standard

quantity of the allocation to production allocation rate base allowed for actual output

= $0.25 per DLHr × (2.00 DLHr per shirt × 1,200 shirts)= $0.25 per DLHr × 2,400 DLHr

= $600

Fixed overhead efficiency variance = Budgeted fixed overhead − Allocated fixed overhead= $700 − $600= $100 U





17.Fixed overhead volume varianceOverhead allocated = Standard overhead × Standard

quantity of the allocation to production allocation rate base allowed for actual output

= $0.25 per DLHr × (2.00 DLHr per shirt × 1,200 shirts)= $0.25 per DLHr × 2,400 DLHr

= $600

Fixed overhead efficiency variance = Budgeted fixed overhead − Allocated fixed overhead= $700 − $600= $100 U

18.Total fixed overhead variance = $50 U + $100 U= $150 U


Describe the Describe the relationship among relationship among

and responsibility for and responsibility for the product cost the product cost

variancesvariances


Flexible Budget Variancesfor Production Costs


Summary of Variances


Product Cost Variance Relationships


Variances Greater than $5,000


Management by Exception


Match the product cost variance with the manager most probably responsible. Some answers may be used more than once. Some answers may not be used.

Variance Manager

19. Variable overhead cost variance a. Human resources

20. Direct materials efficiency variance b. Purchasing

21. Direct labor cost variance c. Production

22. Fixed overhead cost variance

23. Direct materials cost variance


Match the product cost variance with the manager most probably responsible. Some answers may be used more than once. Some answers may not be used.Variance Manager19. Variable overhead cost variance c. Production20. Direct materials efficiency variance 21. Direct labor cost variance 22. Fixed overhead cost variance23. Direct materials cost variance



Variance Manager

19. Variable overhead cost variance c. Production

20. Direct materials efficiency variance c. Production

21. Direct labor cost variance





Variance Manager



21. Direct labor cost variance a. Human resources





Variance Manager




22. Fixed overhead cost variance c. Production




Variance Manager




22. Fixed overhead cost variance c. Production

23. Direct materials cost variance b. Purchasing



Record transactions in Record transactions in a standard cost system a standard cost system and prepare a standard and prepare a standard cost income statementcost income statement


Transaction 1Direct Materials Purchased


A

=

L + E

Transaction 1Direct Materials Purchased


A ↑

=

L ↑ + E ↑

RM↑ A/P ↑ DM Cost Var. ↑

Transaction 2Direct Materials Usage


A

=

L + E

Transaction 2Direct Materials Usage


A ↓

=

L + E ↓

WIP ↑RM↓

DM Eff. Var. ↓

Transaction 3Direct Labor


A

=

L + E

Transaction 3Direct Labor


A ↑

=

L ↑ + E ↑

WIP ↑ Wages Pay. ↑ DL Cost Var. ↓DL Eff. Var. ↑

Transaction 4Manufacturing Overhead


A

=

L + E

Transaction 4Manufacturing Overhead


A ↓

=

L ↑ + E ↓

Accum. Deprn. ↑Cash ↓

Prepaid Ins. ↓

A/P ↑ Mfg. OH ↑

Transaction 5Overhead Allocated


A

=

L + E

Transaction 5Overhead Allocated


A ↑

=

L + E ↑

WIP ↑ Mfg. OH ↓

Transaction 6Completed Goods


A

=

L + E

Transaction 6Completed Goods


A ↑

=

L + E

FG ↑WIP ↓

Transaction 7Cost of Goods Sold


A

=

L + E

Transaction 7Cost of Goods Sold


A ↓

=

L + E ↓

FG ↓ COGS ↑

Transaction 8Adjust Manufacturing Overhead


A

=

L + E

Transaction 8Adjust Manufacturing Overhead


A

=

L + E ↑↓

MOH↑VOH Cost Var. ↑VOH Eff. Var. ↑FOH Cost Var. ↑FOH Vol. Var.↑

Flow of Costs in aStandard Cost System


Exhibit 23-18 Flow of Costs in a Standard Cost SystemExhibit 23-18 Flow of Costs in a Standard Cost System

Standard Cost Income Statement


*From Exhibit 23-5**$19,200 + $25,600 from Exhibit 23-5

Gunter Company reported the following manufacturing overhead variances.

Variable overhead cost variance $ 320 F

Variable overhead efficiency variance 458 U

Fixed overhead cost variance 667 U

Fixed overhead volume variance 625 F


24. Record the journal entry to adjust Manufacturing Overhead.

25. Was Manufacturing Overhead overallocated or underallocated?



Variable Overhead Efficiency Variance 458

Fixed Overhead Cost Variance 667

Variable Overhead Cost Variance 320

Fixed Overhead Volume Variance 625

Manufacturing Overhead 180

To adjust Manufacturing Overhead




Variable Overhead Efficiency Variance 458

Fixed Overhead Cost Variance 667

Variable Overhead Cost Variance 320

Fixed Overhead Volume Variance 625

Manufacturing Overhead 180

To adjust Manufacturing Overhead


Manufacturing Overhead was adjusted with a credit balance, which indicates overhead was underallocated.


End of Chapter 23


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