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Chapter 24

Flexible Budgets and Standard Costs

QUESTIONS

1 Fixed budget per!or"an#e reports ha$e li"ited use!ulness be#ause the% do notre!le#t di!!eren#es in re$enues and $ariable #osts that #an o##ur si"pl% be#ausea#tual $olu"e is di!!erent !ro" budgeted $olu"e This is a serious li"itation &hene$aluating 'ben#h"ar(ing) the reasonableness o! a#tual re$enues and #osts

2 The pri"ar% purpose o! a !lexible budget is to help "anagers better e$aluate pastper!or"an#e* &hi#h #an i"pro$e their abilities to "onitor and #ontrol operations

+ The proper title is, Spalding Co"pan%

Flexible Budget -er!or"an#e .eportFor /ear Ended 0e#e"ber +1* 2

The proper title #o""uni#ates to the user the !o#us o! the report 3lthough it "a%see" ob$ious* "an% reports used in the business &orld do not ha$e a proper ordes#ripti$e title The sooner a student begins to "a(e this a routine tas( in#o"pleting assign"ents* the better s(illed she &ill be !or the business &orld

4 3 !lexible budget per!or"an#e report is use!ul !or an anal%sis o! the di!!eren#ebet&een a#tual per!or"an#e and budgeted per!or"an#e5o!ten #alled $arian#eanal%sis Its use!ulness ste"s !ro" the !a#t that both the budgeted and a#tualresults are based on the sa"e le$el o! a#ti$it%

6 3 $ariable #ost i"plies a #onstant per unit #ost !or ea#h unit produ#ed or sold &ithinthe rele$ant range

7 The hu"an resour#e depart"ent is usuall% responsible !or a labor rate $arian#eThe produ#tion depart"ent is usuall% responsible !or a labor e!!i#ien#% $arian#e8o&e$er* the t&o responsibilities "a% not be #o"pletel% separate For exa"ple* a!a$orable rate $arian#e "a% ha$e o##urred be#ause the hu"an resour#e depart"enthired poorl% trained e"plo%ees* in &hi#h #ase the produ#tion depart"ent used "orehours than expe#ted 'resulting in an un!a$orable e!!i#ien#% $arian#e) be#ause o!

higher &aste

9 3 pri#e $arian#e is that portion o! a #ost $arian#e #aused b% a di!!eren#e bet&eenthe a#tual unit pri#e o! an ite" and its standard pri#e 3 :uantit% $arian#e is thatportion o! a #ost $arian#e #aused b% a di!!eren#e bet&een the a#tual nu"ber o!units o! an ite" used and the standard nu"ber o! units budgeted to be used

McGraw-Hill Companies, 2009

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; Standard #osts are used to establish a basis to assess the reasonableness o! a#tual#osts 3 #o"parison o! standard #osts to a#tual #osts should help "anage"entidenti!% unexpe#ted di!!eren#es and then pursue explanations as to &h% a#tual#osts $aried !ro" the standard

3n o$erhead $olu"e $arian#e is the di!!eren#e bet&een 'a) the a"ount o! '!ixed)

o$erhead that &ould ha$e been budgeted at the a#tual operating le$el a#hie$edduring the period 'that is* budgeted !ixed o$erhead) and 'b) the standard a"ount o!'!ixed) o$erhead applied to a#tual produ#ts produ#ed during the period 3 $olu"e$arian#e o##urs &hen the a#tual $olu"e di!!ers !ro" the expe#ted $olu"e that isused to establish the predeter"ined rate

1 3 predeter"ined standard o$erhead rate is a "easure #o"puted and used in astandard #ost s%ste" to assign o$erhead #osts to produ#ts Be!ore the periodbegins* budgeted total o$erhead #osts '$ariable and !ixed) at the expe#ted $olu"eare di$ided b% the expe#ted a"ount o! the allo#ation base 'dire#t labor hours*"a#hine hours* or so"e other "easure o! a#ti$it%) This %ields the predeter"inedstandard o$erhead rate Then as produ#tion a#ti$ities o##ur* this predeter"inedo$erhead rate is applied to the standard :uantit% o! output produ#ed to establish the

a"ount o! o$erhead assigned to that output

11 In general* $arian#e anal%sis is said to pro$ide in!or"ation about pri#e and :uantit%$arian#es

12 3 #ontrollable $arian#e is the di!!eren#e bet&een 'a) the total o$erhead #ost a#tuall%in#urred in the period and 'b) the total o$erhead #ost that &ould ha$e beenbudgeted at the a#tual operating le$el a#hie$ed Spe#i!i#all%* the #ontrollable$arian#e is the su" o! the total $ariable o$erhead $arian#es 'both $ariable o$erheadspending and e!!i#ien#% $arian#es) and the !ixed o$erhead spending $arian#e

1+ Standard #osts pro$ide a basis !or e$aluating a#tual per!or"an#e Su""ar%in!or"ation #o"paring a#tual #osts to budgeted #osts is #aptured and reported in a!lexible budget The e$aluation reports di!!eren#es bet&een a#tual #osts andstandard #osts as $arian#es

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17 The #ontrollable $arian#e should not be a!!e#ted b% a#hie$ing an a#tual operatingle$el di!!erent !ro" the budgeted le$el I! the #o"pan% operated at 96@ o! #apa#it%*a #ontrollable $arian#e &ill arise onl% i! the a#tual o$erhead #ost is di!!erent !ro" thea"ount sho&n on a !lexible budget !or o$erhead #o"puted at the 96@ le$el

In #ontrast* the $olu"e $arian#e is a!!e#ted &hen the per#ent o! a#tual #apa#it%di!!ers !ro" that expe#ted I! the #o"pan% operated at less than planned '!orexa"ple* at 96@ instead o! the ;@ budgeted) the $olu"e $arian#e &ill beun!a$orable This "eans that the #o"pan% &ill not appl% as "u#h o$erhead to ea#hunit or ?ob as planned Stated di!!erentl%* ea#h ?ob or unit &ill be under#osted

QUICA STU0IES

Qui#( Stud% 241 '16 "inutes)

QU3I CO=-3N/Flexible Budget -er!or"an#e .eport

For =onth Ended =a% +1

Flexible 3#tualBudget .esults

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Qui#( Stud% 24+ '1 "inutes)

Standard dire#t "aterials #ost D+*

=aterials pri#e $arian#e '!a$orable) '24*)

=aterials :uantit% $arian#e '!a$orable) '4* )

3#tual total dire#t "aterials #ost D292*


The !ollo&ing in!or"ation is gi$en

3#tual pri#e per pound D167

Standard pri#e per pound 164

=aterial pri#e $arian#e per pound 'un!a$orable) D 2

It is also (no&n that,=aterial pri#e $arian#e -ri#e $arian#e per pound x 3#tual pounds used

3#tual pounds used =aterial pri#e $arian#e -ri#e $arian#e per pound

There!ore* substituting &ith the in!or"ation gi$en abo$e,

3#tual pounds used D;* D2 4* pounds


1 =anage"ent b% ex#eption in$ol$es "anagers !o#using on the "ostsigni!i#ant $arian#es !or anal%sis and a#tion strategies It also results inless attention gi$en to areas &here per!or"an#e is #lose enough to thestandard to be satis!a#tor% This "eans "anage"ent #on#entrates onthe ex#eptional or irregular situations and de!ers dealing &ith areas thatreport a#tual results reasonabl% #lose to the plan

2 =anage"ent o!ten uses standard #osts to #o"pute these $arian#esSin#e standard #osts are used b% "anagers to !o#us on the areas in&hi#h a#tual results de$iate "ost signi!i#antl% !ro" the nor"* thea##urate setting o! standard #osts is #ru#ial to e!!e#ti$e i"ple"entationo! "anage"ent b% ex#eption


Funamental !ccountin" #rinciples, $9th %ition242

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Standard o$erhead #ost D41*

O$erhead $olu"e $arian#e '!a$orable) '12*)

O$erhead #ontrollable $arian#e 'un!a$orable) 21*6

3#tual total o$erhead #ost D41*6


oods in -ro#ess In$entor% 41*Controllable

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EHE.CISES

Exer#ise 241 '+ "inutes)

T./ON CO=-3N/Flexible BudgetsFor Quarter Ended =ar#h +1* 2

Flexible Budget Flexible Flexible Flexible

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Exer#ise 242 '2 "inutes)

Ite" Cost

a =anage"ent salaries Fixed

b In#o"ing shipping expensesG

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Exer#ise 24+ '26 "inutes)

83 CO=-3N/Flexible Budget -er!or"an#e .eport

For =onth Ended une +


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BU.TON CO=-3N/Flexible Budget -er!or"an#e .eport

For =onth Ended ul% +1


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Exer#ise 246 '+ "inutes)

1O#tober $arian#es

-reli"inar% #o"putations3#tual hours, +*92 hours 'gi$en)

Standard hours, 4* units x 14 hrsunit 6*7 hrs3#tual rate, D4*2+*92 hours D11hrStandard rate, D16hr 'gi$en)

0ire#t labor #ost $arian#es3#tual units at a#tual #ost L+*92 hrs M D11 D4*2Standard units at standard #ost L6*7 hrs M D16 ;4*0ire#t labor #ost $arian#e D4+*; F

.ate and e!!i#ien#% $arian#es

3#tual Cost38 x 3. 38 x S.

Standard CostS8 x S.

+*92 x D11 +*92 x D16 6*7 x D16 hours per hour hours per hour hours per hour

D4*2 D66*; D;4*

D14*;; F

'.ate $arian#e)D2;*2 F

'E!!i#ien#% $arian#e)

D4+*; F'Total labor $arian#e)

3lternate solution !or"at.ate $arian#e 38 x '3. S.)

+*92 hours x 'D11 D16) per hour +*92 hours x D4 per hour D14*;; F

E!!i#ien#% $arian#e '38 S8) x S. '+*92 6*7) hours x D16 per hour

'1*;; hours) x D16 per hour D2;*2 F

.ate $arian#e D 14*;; FE!!i#ien#% $arian#e 2;*2 FTotal D 4+*; F


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Exer#ise 246 .Continue/

No$e"ber $arian#es

-reli"inar% #o"putations3#tual hours, 4*67 hours 'gi$en)

Standard hours, +*6 units x 14 hrsunit 4* hours3#tual rate, D64*924*67 hrs D12hrStandard rate, D16hr 'gi$en)

0ire#t labor #ost $arian#es3#tual units at a#tual #ost L4*67 hrs M D12 D64*92Standard units at standard #ost L4* hrs M D16 9+*60ire#t labor #ost $arian#e D1;*9; F

.ate and e!!i#ien#% $arian#es

3#tual Cost38 x 3. 38 x S. Standard CostS8 x S.

4*67 x D12 4*67 x D16 4* x D16 hours per hour hours per hour hours per hour

D64*92 D7;*4 D9+*6

D1+*7; F

'.ate $arian#e)D6*1 F

'E!!i#ien#% $arian#e)

D1;*9; F

'Total labor $arian#e)

3lternate solution !or"at.ate $arian#e 38 x '3. S.)

4*67 hours x 'D12 D16) per hour 4*67 hours x D+ per hour D1+*7; F

E!!i#ien#% $arian#e '38 S8) x S. '4*67 4*) hours x D16 per hour '+4 hours) x D16 per hour D6*1 F

.ate $arian#e D 1+*7; FE!!i#ien#% $arian#e 6*1 FTotal D 1;*9; F


Funamental !ccountin" #rinciples, $9th %ition2*0

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Exer#ise 246 .Conclue/

2 The !a$orable labor rate $arian#e in O#tober "eans the a#tual rate !or anhour o! labor is less than budgeted The !a$orable labor e!!i#ien#%$arian#e "eans the a#tual hours used are less than budgeted Together*these results #an be interpreted to "ean that e"plo%ees are paid lessthan budgeted* and are also "ore produ#ti$e than budgeted The#o"pan% needs to loo( at these results to deter"ine &h% these t&o$arian#es are !a$orable One explanation is that the standards are out o!date In No$e"ber* there &as a !a$orable rate $arian#e and a !a$orablee!!i#ien#% $arian#e again* &hi#h "a% rein!or#e the possibilit% that thestandards "a% be out o! date


1 -redeter"ined o$erhead rate #o"putationsExpe#ted $olu"e 96@Expe#ted total o$erhead D4*2*Expe#ted hours +96* hrs

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1

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Exer#ise 249 '#ontinued)

InterpretationThe D69*2 un!a$orable spending $arian#e "eans a#tual #ost o! !ixedo$erhead is "ore than budgeted

The D;* un!a$orable $olu"e $arian#e is the result o! the #o"pan%a#tuall% operating at 9@ #apa#it% rather than the budgeted 96@ #apa#it%Not all o! the budgeted !ixed o$erhead is applied to produ#tion be#ausea#tual $olu"e !ell belo& budgeted $olu"e

+ The #ontrollable $arian#e is #o"puted as,

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1oods in -ro#ess In$entor% +74*;0ire#t =aterials -ri#e

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Fixed o$erhead spending and $olu"e $arian#es3#tual O$erhead

Budgeted O$erhead

3pplied O$erhead

'i$en)

2+*126 x D22

D G

D69*2

D6*;96

D G'Spending $arian#e)

D7*+26 U'

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Budgeted !ixed o$erhead 'gi$en)D 69*2

Fixed o$erhead applied '2+*126 hours x D22hr ) 6*;96

O$erhead $olu"e $arian#eD 7*+26 U

G Not #o"putable !ro" in!or"ation gi$en


Funamental !ccountin" #rinciples, $9th %ition2*

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Exer#ise 2411 '#ontinued)

2 O$erhead #ontrollable $arian#eG

Total a#tual o$erhead 'gi$en) D+2*

Flexible budget o$erhead

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-.OBE= SET 3

-roble" 2413 '6 "inutes)

#art $ 0ire#t =aterials

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-roble" 2413 .Conclue/

#art 4 O$erhead

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-roble" 2423.Continue/

#art 2

=3O. CO=-3N/Flexible Budgets

For /ear Ended 0e#e"ber +1* 2

Flexible Budget Flexible Flexible

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-roble" 2423.Conclue/

#art 3

Operating in#o"e in#rease !or a 16* to 1;* unit sales in#rease

-ossible sales 'units) 1;*

Contribution "argin per unit x D12Total #ontribution "argin D2*17*

ess, Fixed #osts '1*21*)-otential operating in#o"e D ;7*

$s Budgeted in#o"e !or 2 6*In#rease D +7*G

G3lternate solution !or"at

Unit in#rease +* UnitsContribution "argin per unit x D12In#rease in #ontribution "argin D+7*

Sin#e there is no in#rease in !ixed #osts* the expe#ted in#rease in operatingin#o"e is the sa"e D+7*

#art 4

Operating in#o"e 'loss) at 12* units

-ossible sales 'units) 12*

Contribution "argin per unit x D12

Total #ontribution "argin D1*44*

ess, Fixed #osts '1*21* )

-otential operating in#o"e D 14*


Funamental !ccountin" #rinciples, $9th %ition2+4

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-roble" 24+3 '46 "inutes)

#art $

=3O. CO=-3N/Flexible Budget -er!or"an#e .eport

For /ear Ended 0e#e"ber +1* 2Flexible 3#tual Budget .esults

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-roble" 2443 'Continue/

#art 3 0ire#t =aterials

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-roble" 2443 .Continue/

#art * O$erhead

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-roble" 2443 .Continue/

'b) Fixed O$erhead-reli"inar% #o"putations3#tual !ixed o$erhead 0epre#iation* building D 2+*

0epre#iation* "a#hiner% 76* Taxes and insuran#e 1;*1 Super$ision 1;6*

Total D21*1

Budgeted !ixed o$erhead D++* 'gi$en)

Standard rate, D11hr

Fixed o$erhead #ost $arian#es

Fixed o$erhead #ost in#urred Lgi$en D21*1Fixed o$erhead #ost applied L+* hrs M D11 ++*Fixed o$erhead #ost $arian#e D 11* F

Fixed O$erhead Spending and

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-roble" 2443 .Conclue/'#) O$erhead Controllable

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-roble" 2463 '; "inutes)

#art $ 0ire#t =aterials

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#art 2 0ire#t abor

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#art 3 O$erhead

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'b) Fixed o$erhead

-reli"inar% #o"putations3#tual !ixed o$erhead 'gi$en), .ent o! !a#tor% building D16*

0epre#iation* "a#hiner% 1* Super$isor% salaries 24*

Total D4*

Budgeted !ixed o$erhead, D44*; 'gi$en)Budgeted hours M ;@ planned #apa#it% +2*

Standard rate, D14hr

Fixed o$erhead #ost $arian#es

Fixed o$erhead #ost in#urred Lgi$en D4*Fixed o$erhead #ost applied L+7* hrs M D14 6*4Fixed o$erhead #ost $arian#e D 1*4 F

Fixed O$erhead Spending and

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#art 4

.EEN CO=-3N/O$erhead

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-roble" 2473 '46 "inutes)

#art $

0e# +1G oods in -ro#ess In$entor% 14*0ire#t =aterials Quantit%

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#art 2

Under "anage"ent b% ex#eption* the "anager &ould !irst identi!% thelargest $arian#es* atte"pt to un#o$er their #auses* and then i"ple"enta#tions ai"ed at #orre#ting the" The s"aller $arian#es &ould be ta#(leda!ter the "a?or proble"s &ere dealt &ith* i! at all

The largest $arian#e a"ounts o##ur !or the "aterials :uantit% $arian#e* thedire#t labor e!!i#ien#% $arian#e* and the t&o o$erhead $arian#es The"anager should go to the produ#tion depart"ent to !ind out &h% thepro#ess used "ore "aterials and less labor hours than expe#ted The#ontrollable $arian#e &ould need to be bro(en do&n into its #o"ponents!or indi$idual #ost ite"s to see &hi#h ones de$iated "ost !ro" expe#tedresultsG Based on these !indings* lo&erle$el "anagers &ould be #alled on

to explain &hat happened3!ter the relati$el% larger a"ounts are explained and a#tions ta(en* the"anager #an see( explanations o! the less signi!i#ant "aterial pri#e$arian#e !ro" the pur#hasing depart"ent and the dire#t labor rate $arian#e!ro" the personnel depart"ent

G The un!a$orable $olu"e $arian#e indi#ates that the #o"pan% produ#ed!e&er ite"s than expe#ted =anagers &ould need to deter"ine &hether this&as be#ause o! de#lining sales* idle ti"e* brea(do&ns* or other reasons

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Ch24FAP19e