The Flexible Budget and Standard Costing

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The Flexible Budget and Standard Costing

• Chapter 13
• Objectives
• Develop and use flexible budgets to analyze
  operating results
• Set proper standard cost for planning, control,
  and performance evaluation

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Effectiveness vs Efficiency
Anoperation is __________ if ithas not
wastedresources.
Anoperation is _________ ifit has attainedor
exceededits goals.
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Assessing EffectivenessCheese Company
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Flexible Budget

• __________________________________________________
  __________________________
• __________________________________________________
  __________________________
• Reveal variances due to good cost control or lack
  of cost control.
• Improve performance evaluation.

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Flexible Budget

• Step 1______________________________
• Step 2 ______________________________ in the
  master budget to calculate the sales revenues and
  variable expenses.
• Step 3 Determine the budget amount of fixed cost
  and compute the flexible budget operating income

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Ex Flexible Budget in Cheese Company
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Ex Flexible Budget in Cheese Company

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Assessing EfficiencyEx Cheese Company
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Selling Price Variance
A selling price variance is the difference
between the total sales revenue received and the
total sales revenue of the flexible budget.
In the Cheese Company example, the budgetedand
actual selling price was 10 per unit. Now
assume that the selling price changes to 11 per
unit, with all other information unchanged.
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Standard Cost
____________________
____________________
Cost
____________________
____________________
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Standard Cost Variance
This variance is unfavorable because the actual
cost exceeds the standard cost.
Standard
A standard cost varianceis the amount by
whichan actual cost differs fromthe standard
cost.
Product Cost
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Types of Standard

• An ideal standard demands perfect implementation
  and maximum efficiency in every aspect of the
  operation
• A currently attainable standard sets the
  performance criterion at a level that a person
  with proper training and experience can attain
  most of the time without having to exert
  extraordinary effort

Should we havestandards that aredifficult to
achieveor standards that canbe achieved
withminimal effort?
Standards should be set at levels that are
currently attainable with reasonable and
efficient effort.
Unattainable standards are discouraging while
standards that are too easy to achieve provide
little motivation.
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Standard

• Source of Standard

• Non-financial Measure

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Direct Material Standards
Use competitivebids for the qualityand quantity
desired.
Use product design specifications.
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Direct Material Standards
The standard material cost for one unit of
product is

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Direct Labor Standards
EfficiencyStandards
RateStandards
Use wage surveys andlabor contracts.
Use time and motion studies foreach labor
operation.
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Direct Labor Standard
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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A General Model of Variance Analysis
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
Price or RateVariance
Usage or Efficiency Variance
AQ(AP - SP)
SP(AQ - SQ) AQ Actual Quantity
SP Standard Price AP Actual Price
SQ Standard Quantity

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Standard Cost Variances
Standard Cost Variances
Efficiency Variance
Price Variance
The difference betweenthe actual price and
thestandard price
The difference betweenthe actual quantity
andthe standard quantity
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Material Variance Example
Hanson Inc. has the following direct material
standard to manufacture one unit of X 1.5 pounds
per X at 4.00 per pound Last month 1,700 pounds
of material were purchased and used to make 1,000
Xs. The material cost a total of 6,630.

• Determine the followings
• What is the actual price per pound paid for the
  material?
• What is Hansons material price variance (MPV)
  for the month?
• What is the standard quantity of material that
  should have been used to produce 1,000 Xs?
• What is Hansons material usage variance (MUV)
  for the month?

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Material Variance Example
Actual Quantity Actual Quantity
Standard Quantity

Actual Price Standard Price
Standard Price
1,700 lbs. 1,700 lbs.
1,500 lbs.

3.90 per lb.
4.00 per lb. 4.00 per lb.
6,630 6,800
6,000
Price variance170 favorable
Usage variance800 unfavorable
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Labor Variance Example

• Hanson Inc. has the following direct labor
  standard to manufacture one X
• 1.5 standard hours per X at 12.00 per direct
  labor hour
• Last month 1,550 direct labor hours were worked
  at a total labor cost of 18,910 to make 1,000
  Xs.

• Determine the followings
• What is actual rate for labor for the month?
• What is Hansons labor rate variance (LRV) for
  the month?
• What are the standard hours (SH) of labor that
  should have been worked to produce 1,000 Xs?
• What is Hansons labor efficiency variance (LEV)
  for the month?

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Labor Variance Example
Actual Hours Actual Hours
Standard Hours

Actual Rate Standard Rate
Standard Rate
1,550 hours 1,550 hours
1,500 hours

12.20 per hour 12.00 per
hour 12.00 per hour 18,910
18,600
18,000
Rate variance310 unfavorable
Efficiency variance600 unfavorable