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GLENCOE / McGraw-Hill

GLENCOE / McGraw-Hill. Controlling Manufacturing Costs: Standard Costs. Cost Behavior and the Budget. Section Objectives. Explain how fixed, variable, and semivariable costs change as the level of manufacturing activity changes.

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GLENCOE / McGraw-Hill

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  1. GLENCOE / McGraw-Hill

  2. Controlling Manufacturing Costs: Standard Costs

  3. Cost Behavior and the Budget Section Objectives • Explain how fixed, variable, and semivariable costs change as the level of manufacturing activity changes. • Use the high-low point method to determine the fixed and variable components of a semivariable cost. • Prepare a fixed budget for manufacturing costs. • Develop a flexible budget for manufacturing costs.

  4. QUESTION: Why do managers need information on the variability of costs? ANSWER: Understanding the variability of costs—how costs change as the volume of output changes—helps managers to control costs and make effective decisions. Page 1094

  5. Page 1094 Classifications of Manufacturing Costs • Variable • Fixed • Semivariable

  6. Page 1094 Variable Costs • Variable costs vary in total in direct proportion to the changes in the level of activity. • Direct materials and direct labor are examples of variable costs. Direct Materials 1 unit = $ 3 1,000 units = $ 3,000 5,000 units = $15,000 • The total variable cost changes, but the cost per unit does not change.

  7. Page 1094 Fixed Costs • Fixed costs do not change in total as the total level of activity changes. • Although fixed costs do not change in total as the level of activity changes, the cost per unit does change. Factory Supervisory Salaries Units ProducedCost Per Unit $5,000/month 2,000 $2.50 $5,000/month 2,500 $2.00

  8. Page 1094 Semivariable Costs • Semivariable costs vary with, but not in direct proportion to, the volume of activity. • Utilities are an example of a semivariable cost: • Fixed portion Needed no matter how many units produced • Variable portion Usage will vary in proportion to level of production

  9. Page 1095 High-Low Point Method • Used to determine the fixed and variable components of a semivariable cost • Helps in preparing budgets and measuring efficiency

  10. Page 1095 High-Low Point Method Semivariable expense: utilities Step 1. Determine the production and cost data for the months of highest and lowest production during the past year. Step 2. Compute the difference in direct labor hours, and the difference in utilities costs, in the months of highest and lowest production. Step 3. Compute the variable cost per direct labor hour. Difference in utilities costs ÷ Difference in direct labor hours Step 4. Compute the fixed cost for a month. Total cost – (direct labor hours x cost per direct labor hour)

  11. Step 1: Determine the production and cost data for the months of highest and lowest production during the past year. Month Direct Labor Hours Utilities Cost January 1,600 $1,800 February 2,160 2,360 March 2,580 2,780 April 2,800 3,000 May 2,900 3,100 June 3,100 3,300 July 2,200 2,400 August 2,040 2,240 September 2,120 2,320 October 2,200 2,400 November 2,060 2,260 December 1,800 2,000 Page 1095 High-Low Point Method

  12. January 1,600 1,800 Month Direct Labor Hours Utilities Cost June 3,100 1,500 $3,300 $1,500 Page 1095 High-Low Point Method • Step 1: Highest production: June 3,100 DL hours $3,300Lowest production: January 1,600 DL hours 1,800 • Step 2: Compute the difference in direct labor hours, and the difference in utilities costs, in the months of highest and lowest production.

  13. Step 1: Highest production: June 3,100 DL hours $3,300Lowest production: January 1,600 DL hours 1,800 • Step 2: Difference: 1,500 DL hours $1,500 Page 1095 High-Low Point Method • Step 3: Compute the variable cost per direct labor hour. Difference in utilities costs ÷ Difference in DL hours = $1,500 ÷ 1,500 DL hours = $1 per DL hour

  14. Step 1: Highest production: June 3,100 DL hours $3,300Lowest production: January 1,600 DL hours 1,800 • Step 2: Difference: 1,500 DL hours $1,500 • Step 3: Variable cost per DL hour: = $1,500 ÷ 1,500 DL hours = $1 per DL hour Variable cost (3,100 DL hours x $1) 3,100 Fixed costs $ 200 Page 1095 High-Low Point Method • Step 4: Compute the fixed cost for a month. June: Total cost $3,300

  15. QUESTION: What is a budget? ANSWER: A budget is an operating plan in monetary units. Page 1096

  16. QUESTION: What is a manufacturing cost budget? ANSWER: A manufacturing cost budget is a budget for each manufacturing cost during the budget period. Page 1096

  17. QUESTION: What is a fixed budget? ANSWER: A fixed budget is a budget that shows only one level of activity. Page 1097

  18. Pacific Manufacturing Company Budget of Manufacturing Costs Month Ended January 31, 20-- Direct materials 20,000.00 Direct labor 12,000.00 Manufacturing overhead Supervision and clerical wages 4,000.00 Other indirect labor (1,000 X $2) 2,000.00 Payroll taxes and fringe benefits [$400 + (1,000 X $2.40)] 2,800.00 Manufacturing supplies [$100 + (1,000 X $0.20)] 300.00 Depreciation 2,500.00 Repairs and maintenance [$500 + (1,000 X $0.50)] 1,000.00 Insurance and taxes 400.00 Total manufacturing overhead 13,000.00 Total manufacturing cost 45,000.00 Page 1098 Fixed Budget of Manufacturing Costs Shows one level of activity – 1,000 direct labor hours

  19. QUESTION: What is a budget performance report? ANSWER: A budget performance report is a comparison of actual costs and budgeted costs. Page 1097

  20. Pacific Manufacturing Company Budget of Manufacturing Costs Month of January 20-- (Over) Budget Actual Under Direct materials 20,000 19,100 900 Direct labor 12,000 11,800 200 Manufacturing overhead Supervision and clerical wages 4,000 3,000 1000 Other indirect labor 2,000 2,190 (190) Payroll taxes and fringe benefits 2,800 2,915 (115) Manufacturing supplies 300 315 (15) Depreciation 2,500 2,300 200 Repairs and maintenance 1,000 1,100 (100) Insurance and taxes 400 400 -0- Total manufacturing overhead 13,000 12,220 780 Total manufacturing cost 45,000 43,120 1,880 Page 1098 Budget Performance Report Highlights differences between budgeted and actual amounts

  21. QUESTION: What is a flexible budget? ANSWER: A flexible budget is a budget that shows the budgeted costs at various levels of activity. Page 1099

  22. Pacific Manufacturing Company Budget of Manufacturing Costs Month of January 20-- Activity Level Number of direct labor hours 950 1,000 1,050 Percent of expected activity 95 100 105 Variable Costs Other indirect labor 1,900 2,000 2,100 Payroll taxes and fringe benefits 2,280 2,400 2,520 Manufacturing supplies 190 200 210 Repairs and maintenance 475 500 525 Total variable costs 4,845 5,100 5,355 Fixed Costs Supervision and clerical wages 4,000 4,000 4,000 Payroll taxes and fringe benefits 400 400 400 Manufacturing supplies 100 100 100 Depreciation 2,500 2,500 2,500 Repairs and maintenance 500 500 500 Insurance and taxes 400 400 400 Total fixed costs 7,900 7,900 7,900 Total manufacturing overhead 12,745 13,000 13,255 Page 1099 Flexible Budget of Manufacturing Costs Allows for different levels of activity

  23. Used when the level of activity fluctuates from month to month Shows fixed and variable costs separately Page 1099 Flexible Budget The different levels of activity are called the relevant range of activity.

  24. Pacific Manufacturing Company Manufacturing Overhead Budget Performance Report Month Ended February 28, 20-- Budget for 960 hours Actual (Over) Under Supervision and clerical wages 4,000 4,000 0 Other indirect labor (960 x $2) 1,920 1,980 (60) Payroll taxes and fringe benefits [$400 + (960 x $2.40)] 2,704 2,650 54 Manufacturing supplies [$100 + (960 x $0.20)] 292 315 (23) Depreciation 2,500 2,500 0 Repairs and maintenance [$500 + (960 x $0.50)] 980 1,050 (70) Insurance and taxes 400 400 0 Total manufacturing overhead 12,796 12,895 (99) Page 1100 Budget Performance Report Compares overhead expenses at an actual activity level of 960 hours

  25. R E V I E W Complete the following sentences: per unit The _______ variable cost does not change as the level of activity changes. Costs that do not change in total as the level of activity changes are called _____ costs. fixed Semivariable ___________ costs vary with, but not in direct proportion to, the volume of activity.

  26. R E V I E W Complete the following sentences: budget The _______ is an operating plan expressed in monetary units. flexible The _______ budget shows the budgeted costs at various levels of activity. budget performance report The _______________________ compares actual costs with budgeted costs.

  27. Thank You for using College Accounting, Tenth Edition Price • Haddock • Brock

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