ACTG 2120 Chapter 23 – Flexible Budgets and Standard Costs
Flexible Budgets • Budgetary Control and Reporting • Fixed budget - budget prepared for one level • Budget prepared for 1,000 units • Costs $10,000 + $5 x • Budgeted Cost = $15,000 • Suppose actual units prepared were 900 units costing $14,700 • Did we beat budget?
Flexible Budgets • We did beat the fixed budget but that amount is really meaningless because we produced less units than the static budget • A flexible budget is a budget prepared for several different levels • A new budget must be produced for actual units produced • 900 units x $5 = 4,500 + 10,000 = $14,500 • Budget = $14,500, Actual = $14,700 • We are over budget by $200.
Variance Analysis • Difference between actual and budget is called a VARIANCE. • For costs: • Variances are FAVORABLE if Actual < Standard • Variances are UNFAVORABLE if Actual > Standard • For revenues, it is the opposite: • Variances are UNFAVORABLE if Actual < Standard • Variances are FAVORABLE if Actual > Standard
Standard Cost Systems • Benchmark or norm used for planning and control purposes; a model or budget against which actual results are compared and evaluated. • Like predetermined OH rates • A budget broken down into one unit of good or service. • Developed for DM, DL, and OH (both variable and fixed) • Each category involves a price and quantity element
Standard Cost Systems • Types of standards • Ideal standards • Currently attainable standards • Who develops standard costs? • Engineers • Cost accountants • Managers • Workers
Standard Cost SystemsReasons for Using • Easier bookkeeping • Motivation • Planning • Control costs • Decision making • Performance evaluation
Standards • Revisions • Should they be revised? • How often? • Management by Exception • Examine only the variances that are “materially” different from budget • Examine the variances which are controllable by management
Direct Material Variances • Price Variance - difference in actual price paid per DM and standard price that should have been paid • Quantity Variance - difference in actual material used and material that should have been used • Causes
Direct Material Variances • AP x AQ SP x AQ purchased • |__________________| • Price Variance • SP x AQ used SP x SQ • |______________| • Quantity Variance
Standard Quantity Allowed • Standard Quantity per unit • X units produced • = Standard Quantity Allowed • Example: • 4 yards per sleeping bag • X 100 bags produced • = 400 yards of fabric allowed
Direct Labor Variances • Rate Variance - difference in rates actually paid and standard wage rates per hour • Time Variance - difference in actual hours worked and standard hours that should have been worked. • Causes
Direct Labor Variances • AR x AH SR x AH SR x SH • |__________________| |_____________| • Rate Variance Time Variance • |_________________________________| • Total Labor Variance
Responsibility for Variances • Materials price - Purchasing • Materials quantity - Production, Purchasing • Labor rate - Personnel, Production • Labor time - Production, Purchasing • BUT: • Must investigate the variance to see who is actually responsible
Overhead Variances • Total OH cost variance • Difference in actual OH and applied OH • Controllable • Volume variance • Causes
Overhead Variances • The standard price for the overhead is determined by the predetermined overhead rate. • This rate can be separated for variable and fixed overhead. • The rate is determined by choosing a level, the “denominator” level, at which a company thinks it will produce.
Predetermined OH Rates • Variable OH: $4,500/900 = $5 • $5,000/1,000 = $5 • $5,500/1,100 = $5 • It makes no difference which level of output we choose to set the variable OH rate. It is $5 for all of the levels.
Predetermined OH Rates • Fixed OH: $10,000/900 = $11.11 • $10,000/1,000 = $10 • $10,000/1,100 = $9.09 • It DOES make a difference which level of output we choose to set the fixed OH rate. The OH rate varies from $11.11 to $9.09 based on the level of units we choose to set the rate. This chosen level is called the DENOMINATOR LEVEL.
Predetermined OH Rates • If we choose to use 900 units to set our OH rate, we will have the higher $11.11 OH rate. • More overhead will be allocated than the other two levels. • We are more likely to have overapplied OH with a higher rate.
Controllable Variance • Difference in actual overhead and flexible budgeted overhead • Flexible budget = • Budgeted Variable OH rate x APPLIED activity (Actual units x budgeted variable OH quantity) • + Fixed budgeted OH
Volume Variance • Difference in • Budgeted total fixed overhead and • Predetermined fixed overhead rate x APPLIED activity (Actual units x Budgeted driver per unit) • Depends on denominator level chosen • Deemed an “uncontrollable” variance • Causes
Homework • Problems 23-1B*, 23-3B, BTN 23-7 • DUE WITH EXAM, FRIDAY, MAY 30