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Budgeting and Standard Cost Systems
Chapter 13
Budgeting
A budget is a financial and quantitative plan for the acquisition and use of resources
Use for Establishing goals
Executing plans to achieve the goals
Comparing actual results with planned results
Budgeting
Types of budgets Static budget
Prepared for one level of activity
Useful for planning
Not useful for controlling or evaluation of results
Flexible budget Prepared for several different levels of activity
Useful for planning, controlling and evaluation of results
Separates variable costs from fixed costs
Master Budget
Overall plan for the organization expressed in unit and dollar terms
Begins with the sales budget All activities exist to support the sales budget Sales budget and current and desired finished
goods inventory levels determine the production budget Sales + desired ending inventory – beginning inventory
= production
Master Budget
Sales budget determines the selling and administrative expense budget
Sales budget contributes to the cash budget
Master Budget
Production budget determines resources needed to support production levels Production budget and current and desired
materials inventories determine the materials purchase budget Production needs + desired ending material inventory –
beginning material inventory = purchases
Production budget also determines the labor needs and overhead costs
Master Budget
Cash budget lists expected cash inflows and outflows Collections from customers Payment for material purchases, labor and overhead Payment for selling and administrative expenses Payment for capital expenditures Borrowing or repayment of loans Miscellaneous items
Dividends, investment income, etc.
Master Budget
Information from the budgets can be used to prepare a budgeted income statement and a budgeted balance sheet The master budget is a plan
The financial statements show the results of operations and financial position if the plan is achieved
Standards
A standard is a measure of what should occur Quantity standard
How much of a resource should be used to produce a certain level of output
Often determined by engineering specifications
Price standard How much the resource should cost Assumes the resource is acquired in normal quantities,
from the normal supplier, etc.
Standards
Standards provide a benchmark to use in evaluating performance
Comparison of actual results to standards results in variances which may indicate where there are problems Did we pay more (or less) than the normal cost?
Did we use more (or less) of the resource than we should have?
Standards
Types of standards Theoretical (ideal) standard
Indicate what can be achieved under perfect conditions
Unrealistic, seldom used
May be used to motivate employees to improve performance, but if used as a goal, they are demotivating
Currently attainable (normal) standard Standard that can be achieved with reasonable effort
Allows for normal inefficiencies
Variance Analysis
Comparison of actual results to standards results in variances “Favorable” variance occurs when the actual
amount is less than the standard “Unfavorable” variance occurs when the actual
amount is greater than the standard “Favorable” and “unfavorable” are not necessarily
good or bad Both represent deviations from what should have
occurred
Variance Analysis
General formulas Standard cost = standard quantity * standard price
Actual cost = actual quantity * actual price
Total variance = standard cost – actual cost
Variance Analysis
Material and labor variances Materials price variance
Labor rate variance
Actual quantity * (standard price – actual price)
Material quantity variance
Labor time variance
Standard price * (standard quantity – actual quantity)
Variance Analysis Overhead variances
Variable overhead controllable variance Measures the efficiency of using variable overhead
resources Budgeted variable overhead at the standard hours
allowed – actual variable overhead
Fixed overhead volume variance Measures the use of fixed overhead resources by
analyzing capacity utilization Standard fixed overhead rate * (Standard hours at
output achieved - 100% of normal capacity)