Chapter 6: Flexible Budgets and Standard Cost Systems

Be warned: this chapter also has dumb and stupid journal entries. i hate this class.

how do managers use budgets to control business activites

• develop strategies

• plan

• direct

• control

master budget is a static budget

meaning it is prered for only one level of sales volume

budget performance report

a report that summarizes the actual results, budgeted amounts, and the differences

variance

the difference between an actual amount and the budgeted amount

static budget variance

the difference between actual results and the expected results in the static budget

variances are favorable (F) if:

an actual amount increases operating income

• actual revenue > budgeted revenue

• actual expense < budgeted expense

variances are unfavorable (U) if:

an actual amount decreases operating income

• actual revenue < budgeted revenue

• actual expense > budgeted expense

flexible budget

summarizes revenues and expenses for various levels of sales volume within a relevant range

separate variable costs from fixed costs

variable costs put the flex in the flexible budget

flexible budget variance

the difference between actual results and expected results in the flexible budget for actual units sold

sales volume variance

the difference between expected results in the flexible budget for the actual units sold and the static budget

standard

the price, cost, or quantity that is expected under normal conditions

standard cost system

an accounting system that uses standards for product costs

Cost Standards - DIrect Materials

Responsibility: purchasing manager

Factors: purchase cost, discounts, delivery requirements, credit policies

Cost Standards - Direct Labor

Responsibility: human resources manager

Factors: wage rate based on experience requirements, payroll taxes, frince benefits

Efficiency Standards - Direct Materials

responsibility: production manager and engineers

factors: product specifications, spoilage, production scheduling

Efficiency Standards - Direct Labor

Responsibility: production manager and engineers

factors: time requirement for the production level and employee experience needed

Manufacturing Overhead - Cost & Efficiency Standards

Responsibility: Production manager

Factors: nature and amount of resources needed to support activities, such as moving materials, maintaining equipment, and product inspection

efficiency standards

• production managers and engineers set direct materials and direct labor efficiency standards

• labor standards are established from analyzing the production process

• efficiency standards are based on best practices, called benchmarking

standard costing helps managers:

• prepare the master budget

• set target levels of performance for flexible budgets

• identify performance standards

• set sales prices of products and services

• decrease accounting costs

cost variance

measures how well the business keeps unit cost of materials and labor inputs within standards

cost variance =

(actual cost - standard cost) x actual quantity

efficiency variance

measures how well the business uses its materials or human resources

efficiency variance =

(actual quantity - standard quantity) x standard cost

the total overhead variance is the difference between:

actual overhead cost and standard overhead allocated to production

overhead allocated to production =

standard overhead allocation rate x standard quantity of the allocation base allowed for actual output

standard overhead allocation rate =

budgeted overhead cost / budgeted allocation base

standard overhead allocation rate (FOH/VOH) =

(budgeted FOH / Budgeted allocation base) + (Budgeted FOH / budgeted allocation base)

variable overhead variances

the approach to analyze the variable overhead flexible budget variances is similar to the approaches used for direct labor and direct materials

to analyze fixed overhead costs, we need:

• actual fixed overhead costs incurred

• budgeted fixed overhead costs

• allocated fixed overhead costs

fixed overhead cost variance

measures the difference between actual fixed overhead and budgeted fixed overhead

fixed overhead cost variance =

actual fixed overhead - budgeted fixed overhead

fixed overhead volume variance

the difference between the budgeted fixed overhead and the amount of fixed overhead allocated

overhead allocated to production =

standard overhead allocation rate x standard quantity of the allocation base allowed for actual output

fixed overhead volume variance =

budgeted fixed overhead - allocated fixed ovehead

management by exception

occurs when managers concentrate on results that are outside the accepted parameters

• managers focus on the exceptions

• exceptions are either a percentage or a dollar amount