© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved

FLEXIBLE BUDGETS ANDSTANDARD COSTS

Chapter 24

McGraw-Hill/Irwin Slide 2McGraw-Hill/Irwin Slide 2

Management usesbudgets to monitor

and controloperations.

Develop the budgetfrom planned objectives.

Compareactual with budget andanalyze anydifferences.

Take corrective andstrategic actions.

Reviseobjectives

and preparea new

budget.

BUDGETARY CONTROL AND REPORTING

McGraw-Hill/Irwin Slide 3McGraw-Hill/Irwin Slide 3

Improve performance evaluation.

May be prepared for any activity level in the relevant range.

Show revenues and expensesthat should have occurred at theactual level of activity.

Reveal variances due to good costcontrol or lack of cost control.

PURPOSE OF FLEXIBLE BUDGETSA 1

McGraw-Hill/Irwin Slide 4McGraw-Hill/Irwin Slide 4

PREPARATION OF FLEXIBLE BUDGETS

To a budget for different activity levels, we must know how costs behave with changes in activity levels.

Total variable costs changein direct proportion to changes in activity.

Total fixed costs remainunchanged within therelevant range.

FixedVaria

ble

P 1

Let’s prepare

budgets for Optel.

McGraw-Hill/Irwin Slide 5McGraw-Hill/Irwin Slide 5

OptelFlexible Budgets

For the Month Ended January 31, 2009

Budget Budget BudgetVariable Total for for forAmount Fixed 10,000 12,000 14,000per Unit Cost Units Units Units

Sales: 10.00$ 100,000$ 120,000$ 140,000$ Total variable costs 4.80 48,000 57,600 67,200 Contribution margin 5.20$ 52,000$ 62,400$ 72,800$

Total fixed costs 40,000$ 40,000 40,000 40,000

Income from operations 12,000$ 22,400$ 32,800$

Exh. 21-3

P 1

Variable costs are a constant amount per unit.

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

Total Fixed costs do not change within the relevant range.

PREPARATION OF FLEXIBLE BUDGETS

McGraw-Hill/Irwin Slide 6McGraw-Hill/Irwin Slide 6

Benchmarks formeasuring performance.

The expected levelof performance.

Based on carefullypredetermined amounts.

Used for planning labor, materialand overhead requirements.Standard

Costs are

STANDARD COSTSC 1

McGraw-Hill/Irwin Slide 7McGraw-Hill/Irwin Slide 7

SETTING STANDARD COSTSC 1

QuantityStandards

PriceStandards

Direct Material

TimeStandards

RateStandards

DirectLabor

ActivityStandards

RateStandards

VariableOverhead

McGraw-Hill/Irwin Slide 8McGraw-Hill/Irwin Slide 8

Prepare standard cost performance

report

Conduct next period’s

operations

Analyze variances

Identifyquestions

Receive explanations

Takecorrective

actions

Begin

COST VARIANCE ANALYSISC 2

McGraw-Hill/Irwin Slide 9McGraw-Hill/Irwin Slide 9

Standard Cost Variances

COST VARIANCE COMPUTATIONS

Quantity VariancePrice Variance

The difference betweenthe actual price and the

standard price

The difference betweenthe actual quantity andthe standard quantity

C 2

McGraw-Hill/Irwin Slide 10McGraw-Hill/Irwin Slide 10

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance Quantity Variance

COST VARIANCE COMPUTATIONSC 2

Standard quantity is the quantity that should have been used for the actual good output.

Standard price is the amount that should have been paid for the resources acquired.

McGraw-Hill/Irwin Slide 11McGraw-Hill/Irwin Slide 11

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

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

Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Price Variance Quantity Variance

COST VARIANCE COMPUTATIONSC 2

McGraw-Hill/Irwin Slide 12McGraw-Hill/Irwin Slide 12

Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate

Rate Variance Efficiency Variance

Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance

AH(AR - SR) SR(AH - SH)

AH = Actual Hours SR = Standard Rate AR = Actual Rate SH = Standard Hours

LABOR COST VARIANCESP 2

McGraw-Hill/Irwin Slide 13McGraw-Hill/Irwin Slide 13

Recall that overhead costs are assigned to products and services using a predetermined

overhead rate (POHR):

Estimated total overhead costs

Estimated activity POHR =

Assigned Overhead = POHR × Standard Activity

OVERHEAD STANDARDS AND VARIANCES

P 3

McGraw-Hill/Irwin Slide 14McGraw-Hill/Irwin Slide 14

Spending Variance

EfficiencyVariance

AH × SVR

AH × AVR

AH = Actual Hours of ActivityAVR = Actual Variable Overhead RateSVR = Standard Variable Overhead RateSH = Standard Hours Allowed

SH × SVR

Actual Flexible Budget Applied Variable for Variable Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours

COMPUTING VARIABLE OVERHEADCOST VARIANCES

P 3

McGraw-Hill/Irwin Slide 15McGraw-Hill/Irwin Slide 15

Spending Variance

VolumeVariance

SFR = Standard Fixed Overhead RateSH = Standard Hours Allowed

SH × SFR

Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied

COMPUTING FIXED OVERHEADCOST VARIANCES

P 3

McGraw-Hill/Irwin Slide 16McGraw-Hill/Irwin Slide 16

TotalOverheadVariance

VariableOverhead

FixedOverhead

EfficiencyVariance

SpendingVariance

VolumeVariance

SpendingVariance

ControllableVariance

P 3 COMPUTING CONTROLLABLE OVERHEAD VARIANCES AND VOLUME

VARIANCES

McGraw-Hill/Irwin Slide 17McGraw-Hill/Irwin Slide 17

END OF CHAPTER 24