Financial and Managerial

Accounting

Wild, Shaw, and Chiappetta

Fourth Edition
McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All
Chapter 21

Flexible Budgets and

Standard Costing
 Conceptual Learning
Objectives

C1: Define standard costs and explain

how standard cost information is
useful for management by exception .

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Analytical Learning Objectives

A1: Analyze changes in sales from

expected amounts.

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 Procedural Learning
Objectives

P1: Prepare a flexible budget and

interpret a flexible budget performance
report.
P2: Compute materials and labor variances.
P3: Compute overhead variances.
P4A: Prepare journal entries for standard costs

and account for price and quantity

variances.
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P1 Budgetary Control and
Reporting
Develop the budget
from planned objectives.

Revise Compare
Management uses
objectives actual with
budgets to monitor
and prepare budget and
and control
a new analyze any
operations.
budget. differences.

Take corrective and

strategic actions.

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A1 Fixed Budget Performance
Report

21-7
A1 Fixed Budget Performance
Report
Optel
If unit sales are higher, should we expect costs to be higher?
Fixed Budget Performance Report
How much ofFor
thethe
higher costs are because of higher unit sales?
Month Ended January 31, 2005
Fixed Actual
Budget Results Variances
Sales: In units 10,000 12,000
In dollars $ 100,000 $ 125,000 $ 25,000 F
Cost of goods sold $ 49,000 $ 58,100 $ 9,100 U
Selling expenses 13,000 15,100 2,100 U
Gen. & admin. expenses 26,000 26,400 400 U
Total expenses $ 88,000 $ 99,600 $ 11,600 U
Income from operations $ 12,000 $ 25,400 $ 13,400 F

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P1

Purpose of Flexible Budgets

Show revenues and expenses
that should have occurred at the
actual level of activity.

May be prepared for any activity

level in the relevant range.

Reveal variances due to good cost

control or lack of cost control.

Improve performance evaluation.

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P1

Preparing Flexible Budgets

To a budget for different activity
levels, we must know how costs
behave with changes in activity levels.
Total variable costs change
in direct proportion to
changes in activity.
Total fixed costs remain ble
unchanged within the aria
V
relevant range. Fixed

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P1

Preparing Flexible Budgets

Variable costs are expressed as

a constant amount per unit.
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P1

Preparing Flexible Budgets

Total variable cost = $4.80 per unit budget level in units

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P1

Preparing Flexible Budgets

Fixed costs are expressed as a total amount that does

not change within the relevant range of activity.
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P1 Flexible Budget Performance
Report

Favorable sales variance indicates that the

average selling price was greater than $10.00.
21-14
P1 Flexible Budget Performance
Report

Unfavorable cost variances indicate

costs that are greater than expected.
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P1 Flexible Budget Performance
Report

Favorable variances because favorable sales

variance overcomes unfavorable cost variances.
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C1

Standard Costs
Based on carefully
predetermined amounts.

Used for planning labor, material

Standard and overhead requirements.
Costs are
The expected level
of performance.

Benchmarks for
measuring performance.

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C1

Setting Standard Costs

Should we use Practical standards should be
practical standards set at levels that are currently
or ideal standards? attainable with reasonable and
efficient effort.

Production Managerial
Engineer Manager Accountant
21-18
C1 Setting Direct Material
Standards
Price Quantity
Standards Standards

Use competitive Use product

bids for the quality design specifications.
and quantity desired.

21-19
C1 Setting Direct Material
Standards
The standard material cost for one unit of product is:
standard quantity
standard price for of material
one unit of material required for one
unit of product

21-20
C1

Setting Direct Labor Standards

Rate Time
Standards Standards

Use wage Use time and

surveys and motion studies for
labor contracts. each labor operation.

21-21
C1

Setting Direct Labor Standards

The standard labor cost for one unit of product is:
standard number
standard wage rate of labor hours
for one hour for one unit
of product

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C1 Setting Variable Overhead
Standards
Rate Activity
Standards Standards

The rate is the The activity is the

variable portion of the cost driver used to
predetermined overhead calculate the
rate. predetermined overhead.

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C1 Setting Variable Overhead
Standards
The standard variable overhead cost for one unit of
product is:
standard variable standard number
overhead rate for of activity units
one unit of for one unit of
activity product

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C1

Standard Cost Card

A standard cost card might look like this:

Standard Standard
Quantity Price Standard
Cost factor or Hours or Rate Cost
Direct materials 1 kg. $ 25 per kg. $ 25.00
Direct labor 2 hours $ 20 per hour 40.00
Variable mfg. overhead 2 hours $ 10 per hour 20.00
Total standard unit cost $ 85.00

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P2

Variances
A standard cost variance
is the amount by which
an actual cost differs from
the standard cost.

Standard cost
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

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P2

Variance Analysis
Take
Identify Receive
corrective
questions explanations
actions

Conduct next
Analyze
periods
variances
operations

Prepare standard
Begin
cost performance
report
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P2

Computing Variances
Standard Cost Variances

Price Variance Quantity Variance

The difference between The difference between

the actual price and the the actual quantity and
standard price the standard quantity

21-28
P2

Computing Variances
Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard price is the amount that should

have been paid for the resources acquired.

21-29
P2

Computing Variances
Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

Standard quantity is the quantity that should

have been used for the actual good output.

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P2

Computing Variances
Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price

Price Variance Quantity Variance

AQ(AP - SP) SP(AQ - SQ)

AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity

21-31
P2

Labor Variances
Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate

Rate Variance Efficiency Variance

AH(AR
Materials price- SR)
variance SR(AH
Materials - SH)
quantity variance
Labor rate variance Labor efficiency variance
AH = Actual
Variable Hours
overhead SRVariable
= Standard Rate
overhead
AR = Actual
spending Rate
variance SHefficiency
= Standard Hours
variance

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P2

Labor Variances
Poorly Poor
trained quality
workers materials

Unfavorable
Efficiency
Variance
Poor Poorly
supervision maintained
of workers equipment
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P3 Overhead Standards and
Variances
Recall that overhead costs are assigned
to products and services using a
predetermined overhead rate (POHR):

Assigned Overhead = POHR Standard Activity

Estimated total overhead costs

POHR = Estimated activity

21-34
P3

Setting Overhead Standards

Contains a fixed Contains a variable

overhead rate which unit rate which stays
declines as activity constant at all levels
level increases. of activity.

Overhead Rate

Function of activity level

chosen to determine rate.

21-35
P3 Computing Variable Overhead
Variances
Actual Flexible Budget Applied
Variable for Variable Variable
Overhead Overhead at Overhead at
Incurred
AH AVR Actual Hours
AH SVR Standard
SH SVRHours

Spending Efficiency
Variance Variance
AH = Actual Hours of Activity
AVR = Actual Variable Overhead Rate
SVR = Standard Variable Overhead Rate
SH = Standard Hours Allowed
21-36
P3 Computing Fixed Overhead
Variances
Actual Fixed Fixed Fixed
Overhead Overhead Overhead
Incurred Budget Applied
SH SFR

Spending Volume
Variance Variance
SFR = Standard Fixed Overhead Rate
SH = Standard Hours Allowed

21-37
P3

Overhead Variance Analysis

Total
Overhead
Variance

Variable Fixed
Overhead Overhead

Spending Efficiency Spending Volume

Variance Variance Variance Variance

Controllable
Variance 21-38
P3

Variable Overhead Variances

Spending Variance Efficiency Variance
Results from paying more A function of the
or less than expected for selected cost driver.
overhead items and from It does not reflect
excessive usage of overhead control.
overhead items.

21-39
P3

Fixed Overhead Variances

Spending Variance Volume Variance

Results from paying more Results from the inability

or less than expected for to operate at the activity
fixed overhead items. planned for the period.
Has no significance for
cost control.

21-40
C1

Standard Costs for Control

Managers focus on quantities and costs
that differ from standards, a practice known as
management by exception.

Standard cost
Amount

Direct
Material
Direct Manufacturing
Labor Overhead

Type of Product Cost

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End of Chapter 21

21-42