ACCT 230 Chapter 9 - Flexible Budgets and Standard costs

Static Budget

Created at beginning of budgeting period and only valid for budgeted level of activity, suitible for planning

Flexible Budget

Prepared at END of period, Budget reflects revenues and costs should have been given actual level of activity during the period, use for performance evaluation!

Why do we use flexible budgets for performance evaluation?

• Numbers are comparble el because they are using the same level of activity

• Must know cost behavior for prepare a flexible budget

Budgeted Revenues > Actual Revenues

Unfavorable

Budgeted Costs < Actual Costr

Unfavorable

Budgeted Revenues < Actual Revenues

Favorable

Budgeted Costs > Actual Costs

Favorable

Standard Costs

Costs that should be incurred under efficient operations, used as a benchmark for measuring performance, Unit amount NOT total amount

What do standard costs include?

1. Quantity Standards

2. Cost (price) Standards

How are standard costs developed?

• consideration of standard price to be paid and quantity to be used

• engineering or historical based

Standard Costs for DM

• DM price should include price paid plus other handling costs <disc>

• DM quantity should include materials required to produce a unit

Standard Costs for DL

• DL rate includes wage plus payroll taxes and fringe benefits

• DL quantity should include DL hrs per unit, rest periods, setup, downtime, etc

Manufacturing OH Standard

Based on standard predetermined OH rate

Why are standard costs used?

• facilitates planning and control (actual vs standard costs and compare variances)

• Inventory costing

Standard costs > actual costs

Favorable

Standard Costs < Actual Costs

Unfavorable

DM Variance

1. DM Price Variance

2. DM usage variance

DL rate variance

1. DL rate efficiency

2. DL efficiency variance (quantity variance)

Var. OH variances

1. Var OH rate variance

2. Var OH Efficiency Rate