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Flexible Budgets and Standard costs. Chapter 23. 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. Management uses budgets to monitor and control operations.

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Flexible budgets and standard costs

Flexible Budgetsand Standard costs

Chapter 23


Budgetary control and reporting
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.


Purpose of flexible budgets
Purpose of Flexible Budgets

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.


Preparation of flexible budgets

Toa 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.

Variable

Fixed

Preparation of Flexible Budgets

P 1


Standard costs

Standard costs are

Standard Costs

C 1

Based on carefullypredetermined amounts.

Used for planning materials,

labor, and overhead requirements.

The expected levelof performance.

Benchmarks formeasuring performance.


Identifying standard costs
Identifying Standard Costs

C 1

Practical standards should be set at levels that are currently attainable with reasonable and efficient effort.

ManagerialAccountant

Engineer

HumanResourcesManager

ProductionManager

Ideal standards, that are based on perfection, areunattainable and discouraging to most employees.


Setting standard costs
Setting Standard Costs

C 1

PriceStandards

Direct Materials

QuantityStandards

RateStandards

TimeStandards

DirectLabor

RateStandards

ActivityStandards

VariableOverhead


Setting standard costs1
Setting Standard Costs

C 1

A standard cost card might look like this:


Cost variance computation

Standard Cost Variances

Price Variance

Quantity Variance

The difference betweenthe actual price and thestandard price.

The difference betweenthe actualquantityandthe standard quantity.

Cost Variance Computation

C 2


Cost variance computation1

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance

Quantity Variance

Cost Variance Computation

C 2

Standard quantity is the quantity thatshould have been usedfor the actual good output.

Standard price is the amount that should have been paidfor the resources acquired.


Cost variance computation2

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance

Quantity Variance

Cost Variance Computation

C 2

AQ(AP - SP) SP(AQ - SQ)

AQ= Actual QuantitySP= Standard PriceAP= Actual PriceSQ= Standard Quantity


Labor cost variances
Labor Cost Variances

P 2

ActualHours ActualHoursStandardHours× × × ActualRate StandardRate StandardRate

Rate Variance

Efficiency Variance

AH(AR - SR) SR(AH - SH)

AH= Actual HoursSR= Standard RateAR= Actual Rate SH= Standard Hours

Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance


Labor cost variances1
Labor Cost Variances

P 2

Using highly paid skilled workers toperform unskilled tasks results in anunfavorable rate variance.

High skill,high rate

Low skill,low rate

Production managers who make work assignmentsare generally responsible for rate variances.


Labor cost variances2

Poorlytrainedworkers

Poorqualitymaterials

Poorsupervisionof workers

Poorlymaintainedequipment

Labor Cost Variances

P 2

UnfavorableEfficiencyVariance


Overhead standards and variances
Overhead Standardsand Variances

P 3

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 =


Setting overhead standards
Setting Overhead Standards

P 3

Contains a fixedoverhead rate whichdeclines as activitylevel increases.

Contains a variableunit rate which staysconstant at all levelsof activity.

Overhead Rate

Function of activity levelchosen to determine rate.

Flexible budgets, showing budgeted amount of overhead for various levels of activity, are used to analyze overhead costs.


Controllable and volume variances
Controllable andVolume Variances

P 3

Overhead

cost

variance

(OCV)

Actualoverhead

incurred

(AOI)

Standard

overhead

applied

(SOA)

=

Total OverheadVariance (OCV)

VolumeVariance

ControllableVariance



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