Budgeting and Standard Cost Systems

Chapter 13

Budgeting

A budget is a financial and quantitative plan for the acquisition and use of resources

Use for Establishing goals

Executing plans to achieve the goals

Comparing actual results with planned results

Budgeting

Types of budgets Static budget

Prepared for one level of activity

Useful for planning

Not useful for controlling or evaluation of results

Flexible budget Prepared for several different levels of activity

Useful for planning, controlling and evaluation of results

Separates variable costs from fixed costs

Master Budget

Overall plan for the organization expressed in unit and dollar terms

Begins with the sales budget All activities exist to support the sales budget Sales budget and current and desired finished

goods inventory levels determine the production budget Sales + desired ending inventory – beginning inventory

= production

Master Budget

Sales budget determines the selling and administrative expense budget

Sales budget contributes to the cash budget

Master Budget

Production budget determines resources needed to support production levels Production budget and current and desired

materials inventories determine the materials purchase budget Production needs + desired ending material inventory –

beginning material inventory = purchases

Production budget also determines the labor needs and overhead costs

Master Budget

Cash budget lists expected cash inflows and outflows Collections from customers Payment for material purchases, labor and overhead Payment for selling and administrative expenses Payment for capital expenditures Borrowing or repayment of loans Miscellaneous items

Dividends, investment income, etc.

Master Budget

Information from the budgets can be used to prepare a budgeted income statement and a budgeted balance sheet The master budget is a plan

The financial statements show the results of operations and financial position if the plan is achieved

Standards

A standard is a measure of what should occur Quantity standard

How much of a resource should be used to produce a certain level of output

Often determined by engineering specifications

Price standard How much the resource should cost Assumes the resource is acquired in normal quantities,

from the normal supplier, etc.

Standards

Standards provide a benchmark to use in evaluating performance

Comparison of actual results to standards results in variances which may indicate where there are problems Did we pay more (or less) than the normal cost?

Did we use more (or less) of the resource than we should have?

Standards

Types of standards Theoretical (ideal) standard

Indicate what can be achieved under perfect conditions

Unrealistic, seldom used

May be used to motivate employees to improve performance, but if used as a goal, they are demotivating

Currently attainable (normal) standard Standard that can be achieved with reasonable effort

Allows for normal inefficiencies

Variance Analysis

Comparison of actual results to standards results in variances “Favorable” variance occurs when the actual

amount is less than the standard “Unfavorable” variance occurs when the actual

amount is greater than the standard “Favorable” and “unfavorable” are not necessarily

good or bad Both represent deviations from what should have

occurred

Variance Analysis

General formulas Standard cost = standard quantity * standard price

Actual cost = actual quantity * actual price

Total variance = standard cost – actual cost

Variance Analysis

Material and labor variances Materials price variance

Labor rate variance

Actual quantity * (standard price – actual price)

Material quantity variance

Labor time variance

Standard price * (standard quantity – actual quantity)

Variance Analysis Overhead variances

Variable overhead controllable variance Measures the efficiency of using variable overhead

resources Budgeted variable overhead at the standard hours

allowed – actual variable overhead

Fixed overhead volume variance Measures the use of fixed overhead resources by

analyzing capacity utilization Standard fixed overhead rate * (Standard hours at

output achieved - 100% of normal capacity)