Chapter 21

1. Chapter 21 Flexible Budgets and Standard Costing

2. Budgetary Control and Reporting • Budgets are used to control and evaluate performance. • We compare the budgeted activity to the actual results and analyze any differences • In chapter 20, we introduced the master budget which is a static budget. • It represents what we expect to happen at a planned level of activity

3. Performance Reports • The comparison of master budget information with actual results is known as a fixed budget performance report. • We can calculate the differences between the two sets of numbers and identify ________ • _______ _______are those that serve to increase income. • _______ _______will result in decreases to income.

4. Fixed Budget Performance Report A2

5. Fixed Budget Performance Report A2 Exh. 21-2 U = Unfavorable varianceActual cost is greaterthan budgeted cost.

6. Fixed Budget Performance Report A2 Exh. 21-2 F = Favorable varianceActual revenue and income are greater than budgeted revenue and income.

7. Fixed Budget Performance Report A2 Exh. 21-2 If unit sales are higher, should we expect costs to be higher? How much of the higher costs are because of higher unit sales?

8. Use of Flexible Budgets • The problem with the _____budget comparison is that the actual and the planned level of activity are usually different. • How much of the differences in revenues and costs are caused by the difference in volume? • We introduce the idea of _____budgets to solve this problem. • A flexible budget reflects projected revenues and costs at the _____level of output.

9. 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.

10. Preparing Flexible Budgets P1 Exh. 21-3 Variable costs are expressed as a constant amount per unit.

11. Preparing Flexible Budgets P1 Exh. 21-3 Total variable cost = $4.80 per unit × budget level in units

12. Preparing Flexible Budgets P1 Exh. 21-3 Fixed costs are expressed as a total amount that does not change within the relevant range of activity.

13. Flexible Budget Performance Report Now let’s prepare a budget performance reportat 12,000 actual units for Optel. P1

14. Flexible Budget Performance Report P1 Exh. 21-4 Favorable sales variance indicates that the average selling price was greater than $10.00.

15. Flexible Budget Performance Report P1 Exh. 21-4 Unfavorable cost variances indicatecosts that are greater than expected.

16. Flexible Budget Performance Report P1 Exh. 21-4 Favorable variances because favorable sales variance overcomes unfavorable cost variances.

17. Standard Costs • Standards are carefully __________costs expressed on a per unit basis. • Standards are used to prepare budgets and can be expressed as follows: • Standard quantity of direct material per unit • Standard cost (price) of direct materials, • Standard wage rate (price) per hour, • Standard labor hours per unit. • Standard overhead rate per unit

18. Standard Costs • We develop standard costs using engineering estimates and time and motion studies. • They may be used in budgeting if we have this information. • They are costly to develop. • But they aid in reviewing and assessing performance. • Standard costs may be used in the accounts instead of actual costs.

19. Cost Per Unit • Direct material cost per unit = • (material price standard) x (standard quantity per unit) • Direct labor cost per unit = • (standard labor rate per hour) x (standard direct labor hours per unit) • Standard MOH per unit = • (standard OH rate) x (activity index standard per unit)

20. Variances • Cost variances are the differences between the total actual costs and total standard costs. • We make this comparison at the actual level of output for the period. • We calculate variances for each of the three elements of product cost.

21. Variance Analysis for Material (and Labor) (Actual quantity) x (actual price) (Actual quantity)x (Standard Price) (Standard quantity) x (standard price) Efficiency (Quantity) Variance Price (Rate) Variance Total cost variance **We will cover only the material and labor variances, not the overhead variances.**

22. Example:Material Variances During May, G-Max produced 3,500 clubheads using3,600 pounds of material. G-Max paid $1.05 perpound for the material.Compute the material price and quantity variances.

23. Material Variances SQ = 3,500 units × 1 lb. per unit = 3,500 lbs. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price 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

24. Standard Cost System • With a standard cost system, the standard costs of the products is recorded in the GIP and FG accounts and the variances are recorded in separate accounts. • GIP Inv 3500 • DM Price Var 180 • DM Quant var 100 • Materials Inventory 3780 • Unfavorable variances will have debit balances and favorable ones will have credit balances.

25. Taking Corrective Action • Who is responsible for the Material Price Variance? Purchasing manager • Who is responsible for the Materials Quantity Variance? Production manager • What can cause a price variance? A quantity variance? • What would happen if we got a good price on substandard materials?

26. The End !