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Budgetary Control

Budgetary Control. Chapter 24. © 2009 The McGraw-Hill Companies, Inc. Standard Costs are. Standard Cost Systems. Based on carefully predetermined amounts. Used for planning labor, material and overhead requirements. The expected level of performance. Benchmarks for measuring performance.

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Budgetary Control

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  1. Budgetary Control Chapter 24 © 2009 The McGraw-Hill Companies, Inc.

  2. Standard Costs are Standard Cost Systems Based on carefullypredetermined amounts. Used for planning labor, materialand overhead requirements. The expected levelof performance. Benchmarks formeasuring performance. In a standard cost system, all manufacturing costsare recorded at standard rather than actual amounts.

  3. I recommend using attainablestandardsthat can be achieved with reasonableand efficient effort. Ideal versus Attainable Standards Should we useideal standards that require employees towork at 100 percent peak efficiency?

  4. Favorable versus Unfavorable Variances This variance is unfavorable because the actual costexceeds the standard cost. These variances are favorablebecause the actual costis less thanthe standard cost. Standard Amount DirectMaterial DirectLabor ManufacturingOverhead Type of Product Cost

  5. Using Flexible Budgets to Calculate Cost Variances • A standard is the expected cost for one unit. • A budget is the expected cost for all units produced. What is the difference between standards and budgets?

  6. The Flexible Budget as a Benchmark Planning Process Control Process Master Budget Flexible Budget Actual Results Based on estimated(budgeted)sales volume. Compare actual results to the flexiblebudget to evaluate performance, aftercontrolling for actual sales volume. A flexible budget for the actual activityis compared with actual results.

  7. Direct Cost Variances SpendingVariance Price VarianceAQ × (SP – AP) Quantity VarianceSP × (SQ – AQ) ActualCostAQ × AP AQ × SP FlexibleBudgetSQ × SP MasterBudgetSQ × SP AP = Actual Price of InputAQ = Actual Quantity of InputSP = Standard Price of Input SQ = Standard Quantity of Input Needed to Achieve a Particular Level of Output SQ Basedon ActualSales Volume SQ Basedon BudgetedSales Volume

  8. Direct Labor Variances SpendingVariance Rate VarianceAH × (SR – AR) Efficiency VarianceSR × (SH – AH) ActualCostAH × AR AH × SR FlexibleBudgetSH × SR AR = Actual Labor RateAH = Actual Labor HoursSR = Standard Labor Rate SQ = Standard Labor Hours Needed to Achieve a Particular Level of Output SH Basedon ActualSales Volume

  9. Mix of skill levelsassigned to work tasks. Level of employee motivation. Quality of production supervision. Production Manager Quality of training provided to employees. Responsibility for Labor Variances Production managers areusually held accountablefor labor variancesbecause they caninfluence the:

  10. Manufacturing Overhead Cost Variances Contain fixed overheadthat remains constantas activity changes. Contain variable overheadthat increases asactivity increases. Overhead Rates Are a function of the activity levelchosen to determine the rate.

  11. Variable Manufacturing Overhead Variances Over- or UnderappliedVariable Overhead VOH Rate VarianceAH × (SVOHR – AVOHR) VOH Efficiency VarianceSVOHR × (SH –AH) Actual VOHAH × AVOHR AH × SVOHR Applied VOH SH × SVOHR SH Basedon ActualSales Volume AH = Actual Direct Labor HoursSH = Standard Direct Labor HoursAVOHR = Actual Variable Overhead Rate SVOHR = Standard Variable Overhead Rate

  12. Rate Variance Efficiency Variance Variable Manufacturing Overhead Variances Results from paying moreor less than expected foroverhead items and from excessive usage ofoverhead items. A function of the selected allocation measure (direct labor hours). It does not reflect overhead control.

  13. Fixed Manufacturing Overhead Variances Over- or UnderappliedFixed Overhead FOH Budget VarianceBFOH – AFOH FOH Volume VarianceFOHR × (AU –BU) Actual FOH Budgeted FOHBU × FOHR Applied FOH AU × FOHR AU = Actual UnitsBU = Master Budget UnitsBFOH = Budgeted Fixed Overhead AVOH = Actual fixed OverheadFOHR = Fixed Overhead Rate Flexible BudgetVolume

  14. Budget Variance Volume Variance Fixed Manufacturing Overhead Variances Results from paying moreor less than expected forfixed overhead items. Results from the inabilityto operate at the activityplanned for the period. Has no significance for cost control.

  15. Supplement 24A – Recording Standard Costs and Variances in a Standard Cost System Common Rules • The initial debit to an inventory account (Raw Materials, Work in Process, or Finished Goods) and the eventual debit to Cost of Goods Sold should be based on the standard cost, not the actual cost. • Cash, payables, or other accounts, such as accumulated depreciation or prepaid assets, should be credited for the actual cost incurred. • The difference between the standard cost (a debit) and the actual cost (a credit) should be recorded as the cost variance. • Unfavorable variances should appear as debit entries; favorable variances should appear as credit entries. • At the end of the accounting period, all the variances should be closed to the Cost of Goods Sold account to adjust the standard cost up or down to the actual cost.

  16. End of Chapter 24 © 2009 The McGraw-Hill Companies, Inc.

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