Post on 26-Jan-2021
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Chapter 23Flexible Budgets
and StandardCost Systems
Chapter 23 Learning Objectives
1. Prepare flexible budgets and performance reports using static and flexible budgets
2. Identify the benefits of a standard cost system and understand how standards are set
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Chapter 23 Learning Objectives
3. Compute the standard cost variances for direct materials and direct labor
4. Compute the standard cost variances for manufacturing overhead
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Chapter 23 Learning Objectives
5. Describe the relationship among and responsibility for the product cost variances
6. Record transactions in a standard cost system and prepare a standard cost income statement
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Learning Objective 1
Prepare flexible budgets and performance reports using static and flexible budgets
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HOW DO MANAGERS USE BUDGETS TO CONTROL BUSINESS ACTIVITIES?
• Managers use budgets for planning and controlling business activities.
• The master budget focuses on the planning step.
• The controlling step involves the decisions managers make during and after the budgeting period, based on the actual results.
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HOW DO MANAGERS USE BUDGETS TO CONTROL BUSINESS ACTIVITIES?
Performance Reports Using Static Budgets
• The master budget is a static budget, which means it is prepared for only one level of sales volume.
• A budget performance report is a report that summarizes the actual results, budgeted amounts, and the differences.
• A variance is the difference between an actual amount and the budgeted amount.
• A static budget variance is the difference between actual results and the expected results in the static budget.
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Performance Reports Using Static Budgets
• Variances are: – Favorable (F) if an actual amount increases
operating income:• Actual revenue > Budgeted revenue
• Actual expense < Budgeted expense
– Unfavorable (U) if an actual amount decreases operating income:
• Actual revenue < Budgeted revenue
• Actual expense > Budgeted expense
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Performance Reports Using
Flexible Budgets
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Preparing Flexible Budgets
• A flexible budget summarizes revenues and expenses for various levels of sales volume within a relevant range.
• Flexible budgets separate variable costs from fixed costs.
• The variable costs put the flex in the flexible budget.
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Preparing Flexible Budgets
To create a flexible budget, you need:• Budgeted selling price per unit• Budgeted variable cost per unit
– Budgeted product costs– Budgeted variable selling and administrative
expenses• Total budgeted fixed costs
– Budgeted fixed manufacturing overhead costs– Budgeted fixed selling and administrative expenses
• Different volume levels within the relevant range
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Preparing Flexible Budgets
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Budget Variances
• Managers want to know why a variance occurred.– A flexible budget variance is the difference
between actual results and expected results in the flexible budget for actual units sold.
– A sales volume variance is the difference between expected results in the flexible budget for the actual units sold and the static budget.
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Budget Variances
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Budget Variances
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Learning Objective 2
Identify the benefits of a standard cost system and understand how standards are set
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WHY DO MANAGERS USE A STANDARD COST SYSTEM TO
CONTROL BUSINESS ACTIVITIES?
• Most companies use standards to develop budgets.
• A standard is the price, cost, or quantity that is expected under normal conditions.
• A standard cost system is an accounting system that uses standards for product costs.
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Setting Standards
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Cost Standards
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Efficiency Standards
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• Production managers and engineers set direct materials and direct labor efficiency standards.
• Labor standards are established from analyzing the production process.
• Efficiency standards are based on best practices, called benchmarking.
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Standard Cost System Benefits
Standard costing helps managers:• Prepare the master budget• Set target levels of performance for
flexible budgets• Identify performance standards• Set sales prices of products and services• Decrease accounting costs
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Variance Analysis for Product Costs
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Variance Analysis for Product Costs
• A cost variance measures how well the business keeps unit cost of material and labor inputs within standards.
• The cost variance is the difference in costs of an input multiplied by the actual quantity used of the input.
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Variance Analysis for Product Costs
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• An efficiency variance measures how well the business uses its materials or human resources.
• The efficiency variance is the difference in the quantities multiplied by the standard cost per unit of the input.
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Variance Analysis for Product Costs
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Learning Objective 3
Compute the standard cost variances for direct materials and direct labor
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HOW ARE STANDARD COSTS USED TO DETERMINE DIRECT MATERIALS AND
DIRECT LABOR VARIANCES?
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Direct Materials Variances
• The flexible budget variance for direct materials is $13,000 unfavorable.
• Additional data concerning direct materials follow, including standards discussed in the previous section:
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Direct Materials Cost Variance
The direct materials cost variance is $9,750 favorable.
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Direct Materials Efficiency Variance
• The direct materials efficiency variance is $22,750 unfavorable.
• The variance is unfavorable because workers used more paraffin than planned for 52,000 batches of crayons.
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Summary of Direct Materials Variance
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Direct Labor Variances
• Cheerful Colors uses a similar approach to analyze the direct labor flexible budget variance. The flexible budget variance for direct labor is $10,400 favorable, as shown in Exhibit 23-10.
• Additional data concerning direct labor follow, including standards discussed in the previous section:
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Direct Labor Cost Variance
• The direct labor cost variance is $20,800 unfavorable.
• The $20,800 direct labor cost variance is unfavorable because Cheerful Colors paid worker $2.00 more per hour than budgeted ($14.00 actual cost – $12.00 standard cost).
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Direct Labor Efficiency Variance
• The direct labor efficiency variance is $31,200 favorable.
• The direct labor efficiency variance is favorable because laborers worked fewer hours than budgeted to produce 52,000 batches of crayons.
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Summary of Direct Labor Variances
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Learning Objective 4
Compute the standard cost variances for manufacturing overhead
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HOW ARE STANDARD COSTS USED TO DETERMINE MANUFACTURING
OVERHEAD VARIANCES?
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• The terms manufacturing overhead and overhead are often used interchangeably.
• The total overhead variance is the difference between:
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Allocating Overhead in a Standard Cost System
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In a standard cost system, the manufacturing overhead allocated to production is as follows:
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Variable Overhead Variances
• The approach to analyze the variable overhead flexible budget variance is similar to the approaches for the other variances.
• The information to calculate the overhead variances is as follows:
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Variable Overhead Cost Variance
• The variable overhead cost variance is $1,040 favorable.
• Cheerful Colors paid less than expected for variable overhead.
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Variable Overhead Efficiency Variance
• The variable overhead efficiency variance is $7,800 favorable.
• The variance is favorable because the laborers worked less than expected.
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Summary of Variable Overhead Variances
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Fixed Overhead Variances
• The approach to analyze fixed overhead variances differs from the process used for the variable cost variances.
• To analyze fixed overhead costs, we need:– Actual fixed overhead costs incurred– Budgeted fixed overhead costs– Allocated fixed overhead costs
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Fixed Overhead Cost Variance
The fixed overhead cost variance measures the difference between actual fixed overhead and budgeted fixed overhead.
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Fixed Overhead Volume Variance
The fixed overhead volume variance is the difference between the budgeted fixed overhead and the amount of fixed overhead allocated.
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Fixed Overhead Volume Variance
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Summary of Fixed Overhead Variances
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Learning Objective 5
Describe the relationship among and responsibility for the product cost variances
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WHAT IS THE RELATIONSHIP AMONG THE PRODUCT COST VARIANCES, AND
WHO IS RESPONSIBLE FOR THEM?
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Variance Relationships
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Variance Responsibilities
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• Cheerful Colors should investigate the variances it feels are significant.
• A situation called management by exception occurs when managers concentrate on results that are outside the accepted parameters.– Managers focus on the exceptions.– Exceptions are either a percentage or dollar
amount.
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Variance Responsibilities
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Learning Objective 6
Record transactions in a standard cost system and prepare a standard cost income statement
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HOW DO JOURNAL ENTRIES DIFFER IN A STANDARD COST SYSTEM?
• Using a standard cost system simplifies the recording process because entries are made at standard costs.
• Variances are recorded as soon as possible.
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Transaction 1—Direct Materials Purchased
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• Cheerful Colors records a debit to Raw Materials Inventory for the standard price for the paraffin (65,000 pounds × $1.75).
• The favorable variance of $9,750 is also recorded.
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Transaction 2—Direct Materials Usage
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• When material is transferred to the Work-in-Process Inventory account, the amount at standard cost is the debit, and the unfavorable efficiency variance is recorded.
Transaction 3—Direct Labor
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• Work-in-Process Inventory is debited for the standard costs of the 13,000 direct labor hours.
• Wages Payable is credited for the actual cost paid to employees, and the unfavorable direct labor cost variance is recorded, along with a favorable efficiency variance.
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Transaction 4—Overhead Incurred
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Manufacturing Overhead is debited for the actual fixed and variable costs of $54,080.
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Transaction 5—Overhead Allocated
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The amount of overhead allocated and recorded to Work-in-Process Inventory is:
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Transaction 6—Completed Goods
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The standard cost of the 52,000 batches of crayons completed is transferred from Work-in-Process Inventory to Finished Goods Inventory.
Transaction 7—Cost of Goods Sold
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The crayons were sold during 2019, so the standard costs are transferred from Finished Goods Inventory to Cost of Goods Sold.
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Transaction 8—Adjust Manufacturing Overhead
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The Manufacturing Overhead account is adjusted, and the overhead variances are recorded.
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Standard Cost
Income Statement
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