Chapter 21 Flexible Budgets and Standard Costs

Chapter 21 Flexible Budgets and Standard Costs

Financial & Managerial Accounting Information for Decisions Seventh Edition Chapter 21 Flexible Budgets and Standard Costs McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 5- 2 Learning Objectives (1 of 2) CONCEPTUAL C1 Define standard costs and explain how standard cost information is useful for management by exception. C2 Describe cost variances and what they reveal about performance. ANALYTICAL A1

Analyze changes in sales from expected amounts. McGraw-Hill Education. 21-2 5- 3 Learning Objectives (2 of 2) PROCEDURAL P1 Prepare a flexible budget and interpret a flexible budget performance report. P2 Compute materials and labor variances. P3 Compute overhead spending and efficiency variances. P4 Compute overhead spending and efficiency variances. (Appendix 21A) P5 Prepare journal entries for standard costs and account for price and quantity variances.

(Appendix 21A) McGraw-Hill Education. 21-3 5- 4 Fixed and Flexible Budgets Managers use budgets to control operations and see that planned objectives are met. A master budget based on a predicted level of activity for the budget period. Two alternative approaches: fixed or flexible budgeting. A fixed budget, or static budget, based on a single predicted amount of sales or other activity measure. A flexible budget, or variable budget, based on several different amounts of sales. McGraw-Hill Education. 21-4 Fixed Budget Performance Report

A fixed budget is based on a single predicted amount of sales. Exhibit 21.2 Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 21-5 3-5 5- 6 Purpose of Flexible Budgets Flexible Budgets Show revenues and expenses that should have occurred at the actual level of activity. May be prepared for several activity levels in the relevant range. Reveal variances due to good cost control or lack of cost control. Improve performance evaluation and helps managers focus on problem areas.

McGraw-Hill Education. 21-6 5- 7 Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. McGraw-Hill Education. 21-7 5- 8 Preparation of Flexible Budgets (1 of 3) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. To flex a budget for different activity levels, we must know how costs behave with changes in activity levels.

Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. McGraw-Hill Education. 21-8 Preparation of Flexible Budgets (2 of 3) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 21-9 3-9 5- 10

Preparation of Flexible Budgets (3 of 3) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. 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. McGraw-Hill Education. 21-10 5- 11 Flexible Budget Performance Report (1 of 3) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. A flexible budget performance report compares actual performance and budgeted performance based on actual sales. In SolCels

case, Januarys sales are 12,000 units. McGraw-Hill Education. 21-11 Flexible Budget Performance Report (2 of 3) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 21-12 3-12 5- 13 Flexible Budget Performance Report (3 of 3) Learning Objective P1: Prepare a flexible budget and interpret a flexible

budget performance report. Favorable sales variance indicates that the average selling price was greater than $10.00 per unit. Favorable variance because favorable sales variance is greater than unfavorable cost variances. McGraw-Hill Education. 21-13 5- 14 NEED-TO-KNOW 21-1 (1 of 2) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. A manufacturing company reports the fixed budget and actual results for the year as shown below. The companys fixed budget assumes a selling price of $40 per unit. The fixed budget is based on 20,000 units of sales, and the actual results are based on 24,000 units of sales.

Prepare a flexible budget performance report for the year. Label variances as favorable (F) or unfavorable (U). McGraw-Hill Education. 21-14 NEED-TO-KNOW 21-1 (2 of 2) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. Fixed Budget (20,000 units) Actual Results (24,000 units) $800,000 $972,000 Variable costs 160,000 240,000 Fixed costs

500,000 490,000 Sales Budget assumptions: Selling price per unit $40.00 ($800,000 divided by 20,000 units) Variable cost per unit $8.00 ($160,000 divided by 20,000 units) Budget Assumptions Sales $40.00 24,000 units =

Variable costs $8.00 24,000 units = Flexible Budget (24,000 units) Fixed costs Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. $960,000 192,000 500,000 21-15 3-15 5- 16 NEED-TO-KNOW 21-1 SOLUTION (1 of 3) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report.

A manufacturing company reports the fixed budget and actual results for the year as shown below. The companys fixed budget assumes a selling price of $40 per unit. The fixed budget is based on 20,000 units of sales, and the actual results are based on 24,000 units of sales. Prepare a flexible budget performance report for the year. Label variances as favorable (F) or unfavorable (U). McGraw-Hill Education. 21-16 NEED-TO-KNOW 21-1 SOLUTION (2 of 3) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. Fixed Budget (20,000 units) Actual Results (24,000 units) $800,000 $972,000

Variable costs 160,000 240,000 Fixed costs 500,000 490,000 Sales Budget Assumptions Sales $40.00 24,000 units = Variable costs $8.00 24,000 units = Flexible Budget (24,000 units)

Fixed costs Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. $960,000 192,000 500,000 21-17 3-17 NEED-TO-KNOW 21-1 SOLUTION (3 of 3) Learning Objective P1: Prepare a flexible budget and interpret a flexible budget performance report. FLEXIBLE BUDGET PERFORMANCE REPORT Flexible Budget (24,000 units)

Actual Results (24,000 units) Variances $960,000 $972,000 $12,000 Variable costs 192,000 240,000 48,000 Unfavorable (U) Contribution margin 768,000

732,000 36,000 Unfavorable (U) Fixed costs 500,000 490,000 10,000 Favorable (F) Net income 268,000 242,000 26,000 Unfavorable (U)

Sales Favorable (F) Copyright 201 McGraw-Hill Education. All rights reserved. No reproduction or distributionEducation. without the prior written consent of McGraw-Hill McGraw-Hill Education. 21-18 3-18 5- 19 Learning Objective C1: Define standard costs and explain how standard cost information is useful for management by exception. McGraw-Hill Education. 21-19

5- 20 Standard Costs Learning Objective C1: Define standard costs and explain how standard cost information is useful for management by exception. Standard costs can be used in a flexible budgeting system to enable management to better understand the reasons for variances Standard costs are Based on carefully predetermined amounts. Used for planning materials, labor, and overhead requirements. The expected level of performance. Benchmarks for measuring performance. McGraw-Hill Education. 21-20 5- 21 Identifying Standard Costs Learning Objective C1: Define standard costs and explain how standard cost information is useful for management by exception.

Managerial accountants, engineers, personnel administrators, and other managers combine their efforts to set standard costs. Standards should be challenging but attainable, and should acknowledge machine breakdowns, material waste, and idle time. Engineer Production Manager Human Resources Manager Managerial Accountant McGraw-Hill Education. 21-21 5- 22 Setting Standard Costs (1 of 3) Learning Objective C1: Define standard costs and explain how standard cost information is useful for management by exception. Direct Materials Price Standards Quantity Standards Direct Labor

Rate Standards Time Standards Variable Overhead Rate Standards Activity Standards McGraw-Hill Education. 21-22 Setting Standard Costs (2 of 3) Learning Objective C1: Define standard costs and explain how standard cost information is useful for management by exception. The standard costs of direct materials, direct labor, and overhead for one bat, manufactured by ProBat, are shown below. This is called a standard cost card. Exhibit 21.5 STANDARD COST CARD Production factor Direct materials Direct labor Overhead Standard Quantity

Standard Cost per unit Total Standard Cost 1 kg $ 25 per kg $25 2 hours $ 20 per hour 40 2 labor hours $ 10 per hour 20 Total

$85 McGraw-Hill Education. 21-23 5- 24 Setting Standard Costs (3 of 3) Learning Objective C1: Define standard costs and explain how standard cost information is useful for management by exception. These standard cost amounts are then used to prepare manufacturing budgets for a budgeted level of production. McGraw-Hill Education. 21-24 5- 25 Learning Objective C2: Describe cost variances and what they reveal about performance.

McGraw-Hill Education. 21-25 5- 26 Cost Variances Learning Objective C2: Describe cost variances and what they reveal about performance. Cost variance difference between actual and standard cost. if actual cost > standard cost Variance is unfavorable (U). If actual cost < standard cost Variance is favorable (F). McGraw-Hill Education. 21-26 5- 27 Cost Variance Analysis (1 of 2)

Learning Objective C2: Describe cost variances and what they reveal about performance. Prepare Reports Analyze Variances Questions and Answers Take Action The process is repeated again. Variance analysis involves preparing a standard cost performance report and comparing actual costs with standard costs. We then investigate variances by asking for explanations and possible causes for the variances. McGraw-Hill Education. 21-27 5- 28 Cost Variance Analysis (2 of 2) Learning Objective C2: Describe cost variances and what they reveal about performance. We should correct problems that caused unfavorable variances and possibly adopt and reward the practices that resulted in favorable

variances. McGraw-Hill Education. 21-28 5- 29 Cost Variance Computation (1 of 2) Learning Objective C2: Describe cost variances and what they reveal about performance. Management needs information about the factors causing a cost variance, but first it must properly compute the variance. In its most simple form, a cost variance (CV) is computed as: Cost Variance (CV) = Actual Cost (AC) - Standard Cost (SC) Actual Cost (AC) = Actual Quantity (AQ) Actual Price (AP) Standard Cost (SC) = Standard Quantity (SQ) Standard Price (SP) McGraw-Hill Education. 21-29

5- 30 Cost Variance Computation (2 of 2) Learning Objective C2: Describe cost variances and what they reveal about performance. Actual quantity (AQ) is the actual amount of material or labor used to manufacture the actual quantity of output. Standard quantity (SQ) is the standard amount of input for the actual quantity of output. Actual price (AP) is the actual amount paid to acquire the actual direct material or direct labor used during the period. Standard price (SP) is the standard price. McGraw-Hill Education. 21-30 5- 31 General Model of Price and Quantity Variances Learning Objective C2: Describe cost variances and what they

reveal about performance. Two main factors cause a cost variance: Cost Variance Price Variance (AQ AP) (AQ SP) Difference between the actual price and standard price Quantity Variance (AQ SP) (SQ SP) Difference between actual quantity and standard quantity Isolating these price and quantity factors in a cost variance lead to these formulas. McGraw-Hill Education. 21-31

5- 32 Cost Variance Computation (1 of 3) Learning Objective C2: Describe cost variances and what they reveal about performance. Standard quantity: Standard quantity is the quantity that should have been used for the actual good output. Price Variance Actual Quantity Actual Price Actual Quantity Standard Price Quantity Variance Actual Quantity Standard Price Standard Quantity Standard Price McGraw-Hill Education. 21-32 5- 33 Cost Variance Computation (2 of 3) Learning Objective C2: Describe cost variances and what they

reveal about performance. Standard Price: Standard price is the amount that should have been paid for the resources acquired. McGraw-Hill Education. 21-33 5- 34 Cost Variance Computation (3 of 3) Learning Objective C2: Describe cost variances and what they reveal about performance. Actual Cost Standard Cost Actual Quantity Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price Standard Price Price Variance Quantity Variance (AP - SP) AQ (AQ - SQ) SP AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity McGraw-Hill Education. 21-34 5- 35

Learning Objective P2: Compute materials and labor variances. McGraw-Hill Education. 21-35 5- 36 Computing Materials and Labor Variances Learning Objective P2: Compute materials and labor variances. G-Max Company makes golf club heads with the following standard cost information: Direct materials (0.5 lb. per unit at $20 per lb.) Direct labor (1 hr. per unit at $16 per hr.) Total standard direct cost per unit McGraw-Hill Education. $10.00 16.00 $ 26.00

21-36 Materials Cost Variances (1 of 3) Learning Objective P2: Compute materials and labor variances. During May, G-Max produced 3,500 club heads using 1,800 pounds of material. G-Max paid $21.00 per pound for the material. Compute the material price and quantity variances. Direct materials (0.5 lb. per unit at $20 per lb.) Direct labor (1 hr. per unit at $16 per hr.) Total standard direct cost per unit McGraw-Hill Education. $10.00 16.00 $ 26.00 21-37 Materials Cost Variances (2 of 3) Learning Objective P2: Compute materials and labor variances.

Use this information to compute the material price and quantity variances before you go to the next slide. McGraw-Hill Education. 21-38 5- 39 Materials Cost Variances (3 of 3) Learning Objective P2: Compute materials and labor variances. Actual Cost Standard Cost Actual Quantity Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price Standard Price 1,800 lbs. 1,800 lbs. 1,800 lbs. 1,750 lbs.

$21.00 per lb. $20.00 per lb. $20.00 per lb. $20.00 per lb. $37,800 $36,000 $36,000 $35,000 Price Variance Quantity Variance $1,800 Unfavorable

$1,000 Unfavorable $2,800 Total Direct Materials Variance (U) SQ = 3,500 units 0.5 per unit = 1,750 lbs. McGraw-Hill Education. 21-39 5- 40 Evaluating Materials Variances Learning Objective P2: Compute materials and labor variances. Who is responsible for material cost variances?? I am not responsible for this unfavorable material quantity variance. You purchased cheap material, so my people had to use more of it. You used too much material because of poorly trained workers and poorly maintained equipment. Also, your poor scheduling requires me to rush order material at a higher price, causing

unfavorable price variances. McGraw-Hill Education. 21-40 5- 41 NEED-TO-KNOW 21-2 (1 of 3) Learning Objective P2: Compute materials and labor variances. A manufacturing company reports the following for one of its products. Compute the direct materials (a) price variance and (b) quantity variance and indicate whether they are favorable or unfavorable. Direct materials standard - 8 pounds @ $6.00 per pound Actual direct materials used - 83,000 pounds @ $5.80 per pound Actual finished units produced - 10,000 McGraw-Hill Education. 21-41 5- 42

NEED-TO-KNOW 21-2 (2 of 3) Learning Objective P2: Compute materials and labor variances. AQ 83,000 lbs. AP $5.80 per lb. SQ 80,000 lbs. SP $6.00 lb. (10,000 units 8 lbs. per unit) McGraw-Hill Education. 21-42 5- 43

NEED-TO-KNOW 21-2 (3 of 3) Learning Objective P2: Compute materials and labor variances. Actual Cost AQ AP 83,000 $5.80 AQ SP AQ SP 83,000 $6.00 83,000 $6.00 $498,000 Standard Cost $498,000 SQ SP 10,000 8 $6.00 $481,400 $480,000

$16,600 Favorable $18,000 Unfavorable Materials Price Variance Materials Quantity Variance $1,400 Unfavorable Total Direct Materials Variance McGraw-Hill Education. 21-43 5- 44 Labor Cost Variances (1 of 3) Learning Objective P2: Compute materials and labor variances.

Instead of price and quantity, for direct labor we use the terms rate and hours. Actual Cost Standard Cost Actual Hours Actual Hours Actual Hours Standard Hours Actual Rate Standard Rate Standard Rate Standard Rate NEW * *Rate Variance

* Efficiency Variance AH(AR - SR) SR(AH SH) AH = Actual Hours SR = Standard Rate AR = Actual Rate SH = Standard Hours McGraw-Hill Education. 21-44 Labor Cost Variances (2 of 3) Learning Objective P2: Compute materials and labor variances. During May, G-Max produced 3,500 club heads working 3,400 hours. G-Max paid an average of $16.50 per hour for the hours worked. Compute the labor rate and efficiency variances. Direct materials (0.5 lb. per unit at $20 lb.) Direct labor 1 hr. per unit at $16 per hr.) Total standard direct cost per unit $10.00

16.00 $26.00 Use this information to compute the labor rate and efficiency variances before you go to the next slide. McGraw-Hill Education. 21-45 5- 46 Labor Cost Variances (3 of 3) Learning Objective P2: Compute materials and labor variances. Actual Cost Standard Cost Actual Hours Actual Hours

Actual Hours Standard Hours Actual Rate Standard Rate Standard Rate Standard Rate 3,400 hours 3,400 hours 3,400 hours 3,500 hours

$16.50 per hr. $16.00 per hr. $16.00 per hr. $56,100 $54,400 $54,400 $16.00 per hr. $56,000 Rate Variance Efficiency Variance $1,700 Unfavorable

$1,600 Favorable $100 Total Cost Variance (U) SQ = 3,500 units 1.0 hour per unit = 3,500 hours. McGraw-Hill Education. 21-46 5- 47 Evaluating Labor Variances Learning Objective P2: Compute materials and labor variances. Evaluating Labor Cost Variances One possible explanation of G-Maxs labor rate and efficiency variances is the use of workers with different skill levels. High skill, high rate Low skill, low rate Using highly paid skilled workers to perform unskilled tasks results in an unfavorable rate

variance. However, fewer labor hours might be required for the work resulting in a favorable efficiency variance. McGraw-Hill Education. 21-47 5- 48 Labor Cost Variances Learning Objective P2: Compute materials and labor variances. Who is responsible for material cost variances?? Production managers who make work assignments are generally responsible for labor cost variances. I am not responsible for the unfavorable labor efficiency variance. You purchased cheap material, so it took more time to process it. You used too much time because of poorly trained workers and poor supervision. McGraw-Hill Education. 21-48

5- 49 NEED-TO-KNOW 21-3 (1 of 2) Learning Objective P2: Compute materials and labor variances. The following information is available for York Company. Actual direct labor cost (6,250 hours @$13.10 per hour) Standard direct labor hours per unit Standard direct labor rate per hour $81,875 2.0 hours $13.00 Actual production (units) 2,500 Budgeted production (units) 3,000 SQ (2,500 units 2 hrs. per unit = 5,000 standard hrs.)

McGraw-Hill Education. 21-49 5- 50 NEED-TO-KNOW 21-3 (2 of 2) Learning Objective P2: Compute materials and labor variances. Actual Cost AQ AR 6,250 $13.10 AQ SR AQ SR 6,250 $13.00 6,250 $13.00 $81,250 $81,250 Standard Cost SQ SR

2,500 2 $13.00 $81,875 $65,000 $625 Unfavorable $16,250 Unfavorable Labor Rate Variance Labor Efficiency Variance $16,875 Unfavorable Total Direct Labor Variance McGraw-Hill Education. 21-50

5- 51 Learning Objective P3: Compute overhead spending and efficiency variances. McGraw-Hill Education. 21-51 5- 52 Overhead Standards and Variances Learning Objective P3: Compute overhead spending and efficiency variances. Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Estimated total overhead costs Estimated activity Assigned Overhead POHR Standard Activity POHR

McGraw-Hill Education. 21-52 5- 53 Standard Overhead Rate (1 of 2) Learning Objective P3: Compute overhead spending and efficiency variances. Standard overhead costs are the overhead amounts expected to occur at a certain activity level. To allocate overhead costs to products or services, management needs to establish the standard overhead cost rate. Uses a threestep process: McGraw-Hill Education. 21-53 5- 54 Standard Overhead Rate (2 of 2) Learning Objective P3: Compute overhead spending and efficiency

variances. Standard Overhead Rate Step 1: Determine an Allocation Base Step 2: Choose a Predicted Activity Level Step 3: Compute the Standard Overhead Rate Flexible budgets, showing budgeted amount of overhead for various levels of activity, are used to analyze overhead costs. McGraw-Hill Education. 21-54 Flexible Overhead Budgets (1 of 2) Learning Objective P3: Compute overhead spending and efficiency variances. (Flexible budgets for overhead prepared at several levels of activity) McGraw-Hill Education. 21-55

5- 56 Flexible Overhead Budgets (2 of 2) Learning Objective P3: Compute overhead spending and efficiency variances. G-Max predicted an 80 percent activity level. This standard overhead rate will be used in computing overhead cost variances. Standard overhead rate is: $8,000 4,000 DL hours = $2.00 per DL hour McGraw-Hill Education. 21-56 5- 57 Computing Overhead Cost Variances Learning Objective P3: Compute overhead spending and efficiency variances. The difference between the total overhead cost applied to products and the total overhead cost

actually incurred is called an overhead cost variance. Its defined as: Overhead cost variance (OCV) = Actual overhead incurred (AOI) Standard overhead applied (SOA) McGraw-Hill Education. 21-57 5- 58 Total Overhead Cost Variance (1 of 2) Learning Objective P3: Compute overhead spending and efficiency variances. Ex: During May, G-Max produced 3,500 club heads working 3,400 hours. G-Max budgeted for 4,000 units (80%). Actual variable overhead was $3,650 and actual fixed overhead was $4,000. McGraw-Hill Education. 21-58

5- 59 Total Overhead Cost Variance (2 of 2) Learning Objective P3: Compute overhead spending and efficiency variances. Overhead cost variance (OCV) = Actual overhead incurred (AOI) Standard overhead applied (SOA) (OCV) = $3,650 + $4,000 3,500 DLH $2.00 per DLH (OCV) = $7,650 $7,000 (OCV) = (unfavorable) $650 To help identify factors causing the overhead cost variance, lets analyze this variance separately for controllable and volume variances. McGraw-Hill Education. 21-59 5- 60 Controllable and Volume Variances Learning Objective P3: Compute overhead spending and efficiency variances.

Overhead cost variance (OCV) = Actual overhead incurred (AOI) Standard overhead applied (SOA) Exhibit 21.15 Total Overhead Variance: Actual total overhead incurred Standard total overhead applied Overhead Controllable Variance: Actual total overhead incurred Budgeted total overhead. Overhead Volume Variance: Budgeted fixed overhead Applied fixed Overhead McGraw-Hill Education. 21-60 Controllable and Volume Variances for G-Max Learning Objective P3: Compute overhead spending and efficiency variances. Overhead Controllable Variance Total overhead variance $ 650

Overhead volume variance 500 Controllable variance (unfavorable) $ 150 Overhead Volume Variance Budgeted fixed overhead (at predicted capacity) $ 4,000 Applied fixed overhead (3,500 DLH $ 1.00/DLH 3,500 Volume variance (unfavorable) McGraw-Hill Education. $ 500

21-61 5- 62 NEED-TO-KNOW 21-4 (1 of 4) Learning Objective P3: Compute overhead spending and efficiency variances. A manufacturing company uses standard costs and reports the information below for January. The company uses machine hours to allocate overhead, and the standard is two machine hours per finished unit. Predicted activity level 1,500 units Variable overhead rate $2.50 per machine hour Fixed overhead budgeted $6,000 per month ($2.00 per machine hour at predicted activity level)

Actual activity level 1,800 units Actual overhead costs $15,800 McGraw-Hill Education. 21-62 5- 63 NEED-TO-KNOW 21-4 (2 of 4) Learning Objective P3: Compute overhead spending and efficiency variances. Compute the total overhead cost variance, overhead controllable variance, and overhead volume variance for January. Indicate whether each variance is favorable or unfavorable. McGraw-Hill Education.

21-63 NEED-TO-KNOW 21-4 (3 of 4) Learning Objective P3: Compute overhead spending and efficiency variances. Actual Overhead $15,800 Flexible Budget Flexible Budget 1,800 units 1,800 units VOH 3,600 MHs $2.50

Standard Cost $9,000 VOH 3,600 MHs $2.50 FOH 6,000 FOH 6,000 Total Flexible Budget $15,000 Total Flexible Budget $15,000 $15,000

$9,000 SQ SR 3,600 MHs $4.50 $16,200 $15,000 $800 Unfavorable $1,200 Favorable Controllab leVariance Overhead Volume Variance $400 Favorable Total Overhead Variance McGraw-Hill Education.

21-64 5- 65 NEED-TO-KNOW 21-4 (4 of 4) Learning Objective P3: Compute overhead spending and efficiency variances. Variable Overhead (1,800 units 2 MHs per unit = 3,600 standard MHs. VOH rate $2.50 per MH) Overhead applied = 3,600 MHs $4.50 per MH (FOH $2.00 + VOH $2.50) McGraw-Hill Education. 21-65 5- 66 Learning Objective A1: Analyze changes in sales from expected amounts. McGraw-Hill Education.

21-66 5- 67 Sales Variances Learning Objective A1: Analyze changes in sales from expected amounts, A similar analysis can be applied to sales variances. We will use two additional G-Max products, Excel golf balls and Big Bert drivers, to illustrate. Consider the following sales data from G-Max: Sales of Excel golf balls (units) . Sales price per Excel golf ball. Sales of Big Bert drivers (units) Sales price per Big Bert driver McGraw-Hill Education. Budgeted Actual

1,000 units 1,100 units $ 10 $ 10.50 150 units 140 units $ 200 $ 190 21-67 Exhibit 21.18 Computing Sales Variances for G-Max (1 of 2) Learning Objective A1: Analyze changes in sales from expected amounts, Excel Golf Balls

Actual Results Flexible Budget Flexible Budget Fixed Budget AS AP AS BP Sales dollars 1,100 $10.50 balls AS BP BS BP 1,100 $10 1,100 $10 1,000 $10 $11,550 $11,000 $550 F $11,000

$10,000 $1,000 F Sales Price Variance Sales Volume Variance AS AP AS BP AS BP BS BP Big Bert Drivers Sales dollars drivers 140 $190 140 $200 140 $200 150 $200 $26,600 $28,000 $1,400 U

Total $28,000 $30,000 $2,000 U Sales Price Variance Sales Volume Variance AS AP AS BP AS BP BS BP $850 U $1,000 U McGraw-Hill Education. 21-68 5- 69

Exhibit 21.18 Computing Sales Variances for G-Max (2 of 2) Learning Objective A1: Analyze changes in sales from expected amounts, *As = actual units; AP= actual sales price; BP = Budgeted sales price: BS = budgeted sales units (fixed budget). McGraw-Hill Education. 21-69 5- 70 Learning Objective P4 (Appendix): Expanded overhead variances and standard cost accounting system. McGraw-Hill Education. 21-70 Appendix 23A: Expanded Overhead

Variances and Standard Cost Accounting System Learning Objective P4: Expanded overhead variances and standard cost accounting system. Exhibit 21A.1 McGraw-Hill Education. 21-71 5- 72 Variable Overhead Variances for G-Max (1 of 5) Learning Objective P4: Expanded overhead variances and standard cost accounting system. Variable Overhead Variance Actual variable overhead (given) .. $3,650 Applied variable overhead (3,500 units I standard DLH $1.00 VOH rate per

DLH) .... 3,500 Variable overhead variance (unfavorable) $ 150 Lets split the $150 unfavorable variance into spending and efficiency variances. . . McGraw-Hill Education. 21-72 5- 73 Variable Overhead Variances for G-Max (2 of 5) Learning Objective P4: Expanded overhead variances and standard cost accounting system.

Spending Variance Actual Variable Overhead Incurred AH AVR Flexible Budget for Variable Overhead at Actual Hours AH SVR Efficiency Variance Flexible Budget for Variable Overhead at Actual Hours AH SVR Applied Variable Overhead at Standard Hours SH SVR McGraw-Hill Education. 21-73 5- 74 Variable Overhead Variances for G-Max (3 of 5) Learning Objective P4: Expanded overhead variances and standard cost accounting system. AH = Actual Hours of Activity

AVR = Actual Variable Overhead Rate SVR = Standard Variable Overhead Rate SH = Standard Hours Allowed McGraw-Hill Education. 21-74 5- 75 Variable Overhead Variances for G-Max (4 of 5) Learning Objective P4: Expanded overhead variances and standard cost accounting system. Recall the G-Max information for May: During May, G-Max produced 3,500 club heads working 3,400 hours. G-Max budgeted for 4,000 units (80%).

Actual variable overhead was $3,650 and actual fixed overhead was $4,000. Compute the variable overhead spending and efficiency variances McGraw-Hill Education. 21-75 5- 76 Variable Overhead Variances for G-Max (5 of 5) Learning Objective P4: Expanded overhead variances and standard cost accounting system. Actual Flexible Budget Flexible Budget Applied Variable for Variable

for Variable Variable Overhead Overhead at Overhead at Overhead at Incurred Actual Hours Actual Hours Standard Hours AH AVR 3,400 hrs. $1.00 3,400 hrs. $1.00 3,500 hrs. $1.00

$3,650 $3,400 $3,400 $3,500 Spending Variance Efficiency Variance $250 Unfavorable $100 Favorable Variable OH Variance $150 Unfavorable McGraw-Hill Education. 21-76 5- 77 Fixed Overhead Variances for GMax (1 of 5) Learning Objective P4: Expanded overhead variances and standard cost accounting system.

Fixed Overhead Variance Actual fixed overhead (given) .. $4,000 Applied fixed overhead (3,500 units I standard DLH $1.00 FOH rate per DLH) .... 3,500 Fixed overhead variance (unfavorable) $ 500 McGraw-Hill Education. 21-77 5- 78 Fixed Overhead Variances for GMax (2 of 5)

Learning Objective P4: Expanded overhead variances and standard cost accounting system. Spending Variance Actual Fixed Overhead (Given) AH AVR Budgeted Fixed Overhead (Flexible Budget) AH SVR Volume Variance Budgeted Fixed Overhead (Flexible Budget) AH SVR Applied Variable Overhead at Standard Hours SH SVR McGraw-Hill Education. 21-78 5- 79 Fixed Overhead Variances for GMax (3 of 5) Learning Objective P4: Expanded overhead variances and standard cost accounting system.

SFR = Standard Fixed Overhead Rate SH = Standard Hours Allowed Lets split the $500 unfavorable variance into spending and volume variances. . . McGraw-Hill Education. 21-79 5- 80 Fixed Overhead Variances for G-Max (4 of 5) Learning Objective P4: Expanded overhead variances and standard cost accounting system. Recall the G-Max information for May: During May, G-Max produced 3,500 club heads working 3,400 hours. G-Max budgeted for 4,000 units (80%). Actual variable overhead was $3,650 and actual fixed overhead was $4,000. Compute the fixed overhead spending and volume variances.

McGraw-Hill Education. 21-80 Fixed Overhead Variances for GMax (5 of 5) Learning Objective P4: Expanded overhead variances and standard cost accounting system. Actual Budgeted Budgeted Applied Fixed Fixed Fixed Fixed Overhead

Overhead Overhead Overhead at Given AH AVR Flexible Budget Flexible Budget AH SVR AH SVR Standard Hours 3,500 hrs $1.00 $4,000 $4,000 $4,000 $3,500 Spending Variance Efficiency Variance

$0 $500 Unfavorabl e Fixed OH Variance $500 Unfavorable McGraw-Hill Education. 21-81 Fixed Overhead Cost Variances Learning Objective P4: Expanded overhead variances and standard cost accounting system. McGraw-Hill Education. 21-82 5- 83 Variable and Fixed Overhead Variances (1 of 2) Learning Objective P4: Expanded overhead variances and standard cost accounting system.

Variable Overhead Spending Variance Results from paying more or less than expected for overhead items and from excessive usage of overhead items. Efficiency Variance A function of the selected cost driver. It does not reflect overhead control. McGraw-Hill Education. 21-83 5- 84 Variable and Fixed Overhead Variances (2 of 2) Learning Objective P4: Expanded overhead variances and standard cost accounting system. Fixed Overhead Spending Variance Results from paying more or less than expected

for fixed overhead items. Volume Variance Results from the inability to operate at the activity level planned for the period. It has no significance for cost control. McGraw-Hill Education. 21-84 5- 85 Learning Objective P5 (Appendix): Prepare journal entries for standard costs and account for price and quantity variances. McGraw-Hill Education. 21-85 5- 86 Standard Cost Accounting System

(1 of 5) Learning Objective P5: Prepare journal entries for standard costs and account for price and quantity variances. Standard cost systems also record costs and variances in accounts. The entries in the next few slides briefly illustrate the important aspects of this process for G-Maxs standard costs and variances for May. McGraw-Hill Education. 21-86 Standard Cost Accounting System (2 of 5) Learning Objective P5: Prepare journal entries for standard costs and account for price and quantity variances. Recording G-Max material costs for May *Many companies record the materials price variance when materials are purchased. For simplicity, we record both the materials price and quantity variances when materials are issued to production.

McGraw-Hill Education. 21-87 Standard Cost Accounting System (3 of 5) Learning Objective P5: Prepare journal entries for standard costs and account for price and quantity variances. Recording G-Max labor costs for May The difference between standard and actual labor costs is explained by two variances. The direct labor rate variance is unfavorable and is debited to that account. The direct labor efficiency variance is favorable and that account is credited. McGraw-Hill Education. 21-88 Standard Cost Accounting System (4 of 5) Learning Objective P5: Prepare journal entries for standard costs and account for price and quantity variances.

Recording G-Max overhead costs for May McGraw-Hill Education. 21-89 5- 90 Standard Cost Accounting System (5 of 5) Learning Objective P5: Prepare journal entries for standard costs and account for price and quantity variances. When Factory Overhead is applied to Goods in Process Inventory, the actual amount is credited to the Factory Overhead account. To account for the difference between actual and standard overhead costs, the entry includes a $500 debit to the Volume Variance, a $250 debit to the Variable Overhead Spending Variance, and a $100 credit to the Variable Overhead Efficiency Variance. McGraw-Hill Education. 21-90

5- 91 NEED-TO-KNOW 21-6 (1 of 2) Learning Objective P5: Prepare journal entries for standard costs and account for price and quantity variances. A company uses a standard cost accounting system. Prepare the journal entry to record these direct materials variances: Direct materials cost actually incurred Direct materials quantity variance (favorable) Direct materials price variance (unfavorable) McGraw-Hill Education. $73,200 3,800 1,300 21-91 NEED-TO-KNOW 21-6 (2 of 2) Learning Objective P5: Prepare journal entries for standard costs and account for price and quantity variances.

McGraw-Hill Education. 21-92 5- 93 End of Presentation McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 21-93

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