Chapter 23

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Prepare a flexible budget for the income

statement
Prepare an income statement performance
report
Identify the benefits of standard costs and
learn how to set standards
Compute standard cost variances for direct
materials and direct labor

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Analyze manufacturing overhead in a

standard cost system
Record transactions at standard cost and
prepare a standard cost income statement

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Budget variancethe difference between an actual

amount and a budgeted figure
Managers use variances to operate a business
Important to know why actual amounts differ from the
budget
Enables managers to identify problems and decide upon
actions to take

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Prepare a flexible budget for the income statement

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Static budget

Prepared for one level of sales volume

Does not change after developed

Variances classification

Favorable (F) if an actual amount increases

operating income
Unfavorable (U) if an actual amount decreases
operating income

Flexible budget

Prepared for several different volume levels within

a relevant range
Separates fixed and variable costs

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Need to know:
Selling price per unit
Variable cost per unit
Total fixed costs
Different volume levels within the relevant range

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Consider the following definitions. Give the cost term to the correct
definitionFlexible Budget, Flexible Budget Variance, Sales
Volume Variance, Static Budget, and Variance
1.A summarized budget for several levels of volume that separates
variable costs from fixed costs.
2. The budget prepared for only one level of sales volume.
3. The difference between an actual amount and the budget.
4. The difference arising because the company actually earned more
or less revenue, or incurred more or less cost, than expected for the
actual level of output.
5. The difference arising only because the number of units actually
sold differs from the static budget units.

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2
Prepare an income statement performance report

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Managers need to know why variance occurred

To pinpoint problems
To take corrective action

Managers divide the static budget variance into

two broad categories
Flexible budget variance
Sales volume variance

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Computations

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Moje, Inc., manufactures travel locks. The budgeted selling

price is $19 per lock, the variable cost is $8 per lock, and
budgeted fixed costs are $15,000.
1. Prepare a flexible budget for output levels of 4,000 locks
and 7,000 locks for the month ended April 30, 2012.
Moje, Inc.
Flexible Budget
Month Ended April 30, 2012
Flexible Budget
Output Units (Locks)
per Output Unit
4,000
7,000
Sales revenue
Variable expenses
Contribution margin
Fixed expenses
Operating income (loss)
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3
Identify the benefits of standard costs and learn
how to set standards

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Budget for a single unit

Each unit has standards for price and quantity
Inputs:
Direct materials
Direct Labor

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Price Standards

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Determine cost standards for materials, labor, and overhead

Direct materials price standard for vinyl:
Purchase price, net of discounts
Delivery, receiving, and inspection
Total standard cost per square foot of vinyl

$1.90 per square foot

0.10 per square foot
$2.00 per square foot

Direct labor (DL) price (or rate) standard:

Hourly wage
Payroll taxes and fringe benefits
Total standard cost per direct labor hour

$ 8.00 per direct labor hour

2.50 per direct labor hour
$10.50 per direct labor hour

Variable overhead price (or rate) standard:

Fixed overhead price (or rate) standard:

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Helps managers:
Prepare the master budget
Set target levels of performance (static budget)
Identify performance standards (standard quantities
and standard costs)
Set sales prices of products and services
Decrease accounting costs

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Once established, use the standard cost to assign costs to

production
Once a year, compare actual production costs to standard
costs to locate variances
Variance Relationships

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Measures how well the business keeps unit

costs within standards
Difference in price of an input, multiplied by
the actual quantity used

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Measures how well the business uses its

materials or human resources
It is the difference in quantities multiplied by
the standard price per unit

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The Relationships Among Price, Efficiency, Flexible Budget,

Sales Volume, and Static Budget Variances

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4
Compute standard cost variances for direct
materials and direct labor

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Main concern: The $4,000 unfavorable flexible budget

variance
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Identify fixed and variable costs

Recall standard cost (computed earlier)
Overhead

Identify the cost of one unit of production

Materials = 1 square foot per DVD = $2.00
Labor = .40 hours per DVD = $4.20
Variable Overhead = .40 hours per DVD = $0.80

Actual Sales Results = 10,000

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To compute variances, use the cost computed for

the flexible budget and actual results
Follow the direct materials variance of $2,800

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Two types of direct materials variances:

Direct materials price variance

Direct materials efficiency variance

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To compute variances, use the cost computed for

the flexible budget and actual results
Follow the direct labor variance of $ 200

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Two types of direct labor variances:

Direct labor price (rate) variance

Direct labor efficiency variance

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Johnson, Inc., is a manufacturer of lead crystal glasses. The standard

materials quantity is 0.8 pound per glass at a price of $0.30 per
pound. The actual results for the production of 6,900 glasses was
1.1 pounds per glass, at a price of $0.40 per pound.
1.Calculate the materials price variance and the materials efficiency
variance.

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Johnson, Inc., manufactures lead crystal glasses. The standard direct

labor time is 0.3 hour per glass, at a price of $13 per hour. The
actual results for the production of 6,900 glasses were 0.2 hour per
glass, at a price of $10 per hour.
1. Calculate the labor price variance and the labor efficiency
variance.

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5
Analyze manufacturing overhead in a standard
cost system

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Total overhead variancethe difference between actual

overhead cost and standard overhead allocated to production

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To compute variances, use the cost computed for the

flexible budget and actual results
Follow the variable overhead variance of $1,000

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Two types of variable overhead variances:

Variable overhead spending (price) variance

Variable overhead efficiency variance

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To compute variances, use the cost computed for

the flexible budget and actual results
Follow the fixed overhead variance of $2,700

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Two types of variable overhead variances

Fixed overhead spending variance

Fixed overhead volume variance

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Refer to the data from Johnson, Inc., in S23-6 and S23-7. The
following information relates to the companys overhead costs:
Static budget variable overhead $ 9,000
Static budget fixed overhead
$ 4,500
Static budget direct labor hours
1,800 hours
Static budget number of glasses
6,000

Johnson allocates manufacturing overhead to production based on

standard direct labor hours. Last month, Johnson reported the
following actual results: actual variable overhead, $10,200; actual
fixed overhead, $2,830.
1.Compute the standard variable overhead rate and the standard
fixed overhead rate.

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Refer to the Johnson data in S23-6, S23-7, and S23-9.

Compute the variable and fixed overhead variances.
Use Exhibits 23-11 and 23-12 as guides.

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6
Record transactions at standard cost and
prepare a standard cost income statement

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Records variances from standards as soon as possible

Records direct materials price variances when materials
are purchased

Work in process inventory is debited at standard input

quantities and standard prices

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Manufacturing wages is debited at standard

prices for direct labor hours actually used

Work in process inventory is debited for the

standard cost per direct labor hour that should
have been used

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Record actual overhead cost for June

Record the overhead allocated to Work in

process inventory computed

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Record the transfer of the standard cost of the

DVDs completed from Work in process
inventory to Finished goods

Record the transfer of the cost of sales of the

10,000 DVDs sold at standard cost

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Closes the Manufacturing overhead account and

records the overhead variances

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Copyright

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stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

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