Chapter 21 - Flexible Budgets and Standard Costs

budget reports

compare budgeted results to actual results

can be prepared at any time for any period

master budget

based on a predicted level of activity i.e. sales volume

two options in preparing a master budget

fixed budgeting

flexible budgeting

fixed budget

aka static, based on one predicetd amt of sales or other measure

**less useful when actual activity differs from fixed budget activity levl

flexible budget

aka variable budget, based on more than one amount of sales or other activity measure

**useful for any sales activity levle

performance report

shows budgeted, actual, and variance

variance

diff between budgeted and actual amts

fixed budget performance report

compares actual results w expected reults under fixed budget

favorable variance m

when actual cost < budg cost, act income > budg income, act rev > budg rev

unfavorable variance m

when actual income < budg income, actual rev < budg rev, actual costs > budg costs

budget reports for evluation

managers use budget reports to monitor and control operations

fixed budget report is limited bc not an apples-to-apples comparison but flexible budget report is

**budget reports used to determine bonuses of managers

flexibl budget report

prepared before and after

before - based on several levels of activity to provide what if analysis

after - helps evaluate performance, apples-tp-apples comparison bc budgeted = actual activity level

**comparisons of budgeted and actual at same levels more likely to reveal causes of variances

steps to make felxibile budget repor

(1) identify activity levels

(2)identify costs and classify as fixed or variable

(3) compute budgeted sales, variable costs, fixed costs, and income

income = sales - VC - FC

**sales and VC increase as activity level increases but FC stays same

**flexible budgets can be prepared at ANY activity level

flexible budget equation

budgeted costs = total fixed costs + total variable cost per unit x units of activity

**management can quickly compare costs for any activity level

flexible budget performance report

compares actual performance and budgeted performance bassed on actual activity level 

whereas fixed budget performance report cmpares actual and budgeted under fixed activity level

standard costs

preset costs for delivering a product or service under normal conditions

**manufacturing use for DM, DL, and OH

budgets prepared using standard costs

management by exception

managers focus attention on most significant variances (diffs between actual and standard costs)

true/false: use of budgeting and standard costing is effective in controlling costs, especially overhead costs

true

how are standard costs set?

DL: set by time and motion studies to figure out standard DL hours

DM: quantity, grade, and cost of each material sued

OH: studying resources needed to support production activities

**standards should be challenging yet attainable, acknowledge machine breakdowns, material waste, and idle time

ideal standard

quantity of DM required if process is 100% efficient

practical standard

quantity of DM required under normal operaionts (including errors)

cost variance

diff between actual and standard cost

cost variance

total = actual cost - standard cost

= AQ x AP - SQ x SP

direct materials two kinds of variances

price - diff between actual price per unit of input and standard price per unit

quantity - diff between actual q of input used and standard q of input that should have been used

price = (AQXAP) - (AQxSP)

quantity = (AQxSP) - (SQxSP)

price + quantity = total variance for direct materials

who is repsonsile for price paid for materials

purchasing department

who is responsible for quantity of dm used

production department

DL variances

rate variance = AH x AR - AH x SR

efficiency variance = AH x SR - SH x SR

combined = DL variance total

standard overhead rate determination

determine allocation base - w more and more automation, it’s being used as machine hours instead of labor hours

predict activity level - according to Fed Reserve Board, US businesses operate at an average capacity level of 80%

computer standard overhead rate = budgeted overhead / standard allocation base

standard overhead applied

actual production x standard amt of allocation base x standardoverhead rate

overhead variance

actual total overhead - standard overhead

includes controllable and volume

controllable = actual - budgeted

volume = budgeted - standard overhead applied

**volume is not controllable, has to do w changes in capacity

positives of standard costing

provides benchmarks for management by exception

motivates employees to work toward goals

useful in budgeting process

isolates reasons for good or bad performance

negatives for standard costing

standards are costly to develop and keep up-to-daye

variances are not timely for adapting to rapoidly changing businessconditions

employees may not try to continous improvement

sales variances

sales price variance

sales volume variance m

sales price variance

measures impact of actual sales price differing from expected prices

= (AS x AP - (AS x BP)

sales volume variance

measures impact of operating at a diff capacity level than predicetd by fixed budget

= (AS x BP) - (BS x BP)

what does sales variance analysis depend on

future sales estimates

sales growth rate

(analysis period sales - base period sales) / base period sales