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Chapter 28. Budgets and Standard Costing. LO1. Learning Objective 1 Compare fixed and flexible budgets. Budgetary Control and Reporting. Develop the budget from planned objectives. Compare actual with budget and analyze any differences. Revise objectives and prepare a new budget.
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Chapter 28 Budgets andStandard Costing
LO1 Learning Objective 1Compare fixed and flexible budgets. Budgetary Control and Reporting • Develop the budgetfrom planned objectives. • Compareactual with budget andanalyze anydifferences. • Reviseobjectivesand preparea newbudget. Management usesbudgets to monitorand controloperations. • Take corrective andstrategic actions.
LO1 Show revenues and expensesthat should have occurred at theactual 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.
LO2 Variable Fixed Learning Objective 2Prepare a flexible budget and interpret a flexible budget performance report. To a budget for different activity levels, we must know how costs behave with changes in activity levels. • Total variable costschangein direct proportion to changes in activity. • Total fixedcosts remainunchanged within therelevant range.
LO2 Flexible Budget Performance Report Example: Flexible budget performance report at 12,000 actual units for Optel. Favorable variances because favorable sales variance overcomes unfavorable cost variances.
LO3 Learning Objective 3Define standard costs and explain their computation and uses. Standard costs are preset costs for making a product or delivering a service. We can think of standard costs as budgeting on a per unit basis. The standard material cost for one unit of product is: Standard quantity Standard price for of material one unit of material required for one unit of product × The standard labor cost for one unit of product is: Standard number Standard wage rate of labor hours for one hour for one unit of product ×
LO3 Setting Overhead Standards The standard overhead cost for one unit of product is: Predetermined Standard number overhead rate of activity units for one unit of for one unit of activity product × A standard cost card might look like this:
LO4 Standard cost DirectMaterial DirectLabor Learning Objective 4Describe variances and what they reveal about performance. This variance isfavorablebecausethe actual costis less thanthestandard cost. This variance is unfavorable because the actual cost exceeds the standard cost. Amount ManufacturingOverhead Type of Product Cost
LO4 Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Cost Variance Computation Standard price is the amount that should have been paidfor the resources acquired. Standard quantity is the quantity thatshould have been usedfor the actual good output. AQ(AP - SP) SP(AQ - SQ) AQ= Actual QuantitySP= Standard PriceAP= Actual PriceSQ= Standard Quantity
LO5 Labor Cost Variances Learning Objective 5 Compute materials, labor, and overhead variances. During May, G-Max produced 3,500 clubheads working 3,400 hours. G-Max paid an average of $8.30 per hour for the hours worked. SQ = 3,500 units × 1 lb. per unit = 3,500 lbs. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Materials Cost Variances 3,600 lb. 3,600 lbs. 3,500 lbs. × × × $1.05 per lb. $1.00 per lb. $1.00 per lb. $3,780 $3,600 $3,500 Price variance$180 unfavorable Quantity variance$100 unfavorable
LO5 Overhead Cost Variances Now that we have mastered material and labor variances, we can apply the same concepts to overhead. Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Assigned Overhead = POHR × Standard Activity Estimated total overhead costsEstimated activity POHR =
LO5 Computing the FactoryOverhead Variance During May, G-Max produced 3,500 clubheads working3,400 hours. Actual factory overhead was $7,650.Compute the factory overhead variance.
LO5 Computing the FactoryOverhead Variance Actual Applied Factory Factory Overhead Overhead at Incurred Standard Hours 3,500 hours ×$2.00 per hour $7,650 $7,000 Factory overheadcost variance$650 unfavorable
LO6 $550 FSales PriceVariance $1,000 FSales VolumeVariance $1,400 USales PriceVariance $2,000 USales VolumeVariance Learning Objective 6Analyze changes in sales from expected amounts. A similar analysis can be applied to sales variances. To illustrate sales variances, we will use two additional G-Maxproducts, golf balls and drivers.
