ACC 200 CH 21 Flexible and Standard Costs

Why do managers use budgets

Managers use budgets to control operations and see that planned objectives are met.

master budget

is based on a predicted level of activity for the budget period.

Budget reports

compare budgeted results to actual results

fixed budget (or static budget)

based on a single predicted amount of sales or other activity measure

Flexible budget ( or variable budget)

based on more than one amount of sales or other activity measure.

Fixed Budget Performance Report

compares actual results with the results expected under its fixed budget. Will show the variance F or U

Variance

Is the difference between budgeted and actual amounts.

Favorable Variance (F)

when actual income is higher than budgeted income. It is also when actual revenue is higher than budgeted revenue or when actual cost is lower than budgeted cost.

Unfavorable variance (U)

when actual income is lower than budgeted income. It is also when actual revenue is lower than budgeted revenue, or when actual cost is higher than budgeted cost.

Purpose of flexible budgets

1. Prepared before period begins is

based on several levels of activity

2. Provide a "what-if" analysis that includes best-case and worst-case activity levels.

3. Provides an "apples to apples"

comparison.

4. Prepared after period ends help

evaluate performance. Management

can focus on problems.

Total Budgeted costs for flexible budgets=

total fixed costs + (Total var cost per unit X Units of activity)

Flexible budget performance report

compares actual performance and budgeted performance based on actual activity level (ex 12,000 units)

**has variances

Standard costs

can be used in a flexible budgeting system to enable management to better understand the reasons for variances

1. Preset costs for delivering a product or service under normal conditions

2. the expected level of performance

3. Manufacturers use standard costing for direct materials, direct labor and OH costs

**Budgets are prepared using standard costs

**Can also help control non-manufacturing costs for service companies

Ideal standard

Based on 100% efficiency

Practical standard

is based on normal operating conditions which allow for some inefficiency.

How standard costs are used

Standard costs are used to prepare manufacturing budgets for a budgeted level of production.

EX. DM: Standard quantity (2.2lbs) X Standard Price ($10 per pound) = Standard cost per unit ($22)

cost variance

Difference between the actual incurred cost and the standard cost.

Cost variance analysis

(1) preparing a standard cost performance report

(2) computing and analyzing variances

(3) identifying questions and their answers

(4) taking corrective and strategic actions

Cost Variance Computation

= Actual Cost - Standard Cost

Actual cost = AQ x AP

-

Standard cost = SQ x SP

=

CV

2 main causes of DM and DL variances

1. Price (or rate) variance -- is the difference between actual price per unit of input and standard price per unit of input

2. Quantity (or efficiency) variance -- is the difference between actual quantity of input used and standard quantity of input that should have been used.

Price Variance

difference between actual price per unit of input and standard price per unit of input

Price Variance = (AQ x AP) - (AQ x SP)

Quantity Variance

is the difference between actual quantity of input used and standard quantity of input that should have been used.

Quantity variance = (AQ x SP) - (SQ x SP)

Direct materials variance example

AQ and AP

1800lbs x 21per lb = $37,800

-

SQ and SP

1750lbs x $20per lb = 35000

=

$2,800 U (we want our DM cheaper than standard costs)

*purchasing dept. is responsible for price paid for materials

Direct labor variance example

Actual Hours (AH)

AH x AR

1700hrs x $33per DLH =$56,100

-

SH x SR

1750hrs x $32per DLH = $56,000

=$100 U

flexible overhead budget

Shows # units of production and variable variable costs per unit and total fixed costs and how they would change at different capacity levels to see the total overhead cost

Standard overhead rate =

= Budgeted OH at predicted activity level / standard allocation base at predicted activity level

Standard OH Rate Steps

1. Determine an allocation base -- Ex, DLH or machine hours - 0.5 dlh per unit

2. Predict an activity level -- predicted activity level is not set at 100% of capacity

3. Compute the standard OH rate

Overhead variance

Difference between the actual total overhead and the standard OH applied

Standard overhead applied =

= Actual production X Standard amount of allocation base X standard OH rate

Overhead Variance =

=Actual total OH - Standard OH applied

Volume Variance

Is the difference between budgeted OH and the standard OH applied at the actual units produced.

occurs when the company operates at a different capacity level than was predicted.

Volume Variance = Budgeted OH - Stand. OH applied

controllable variance

Part of the overhead variance under the production managers control.

controllable variance = Actual total OH - Budgeted (flexible) total OH at ACTUAL units produced

Sales Variances

The budgeted amount of unit sales is the predicted activity level, and the budgeted selling price is treated as a "standard" price.

Computing sales variance

Sales Price Variance = Actual Sales price - Budgeted sales price

Sales volume variance =

actual sales minus budgeted sales