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flexible budgets and standard costs

Objectives. Prepare a flexible budget for the income statementUse the flexible budget to show why actual results differ from the static budgetIdentify the benefits of standard costs and learn how to set standardsCompute standard cost variances for direct materials and direct laborAnalyze manufacturing overhead in a standard cost systemRecord transactions at standard cost and prepare a standard cost income statement.

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flexible budgets and standard costs

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    1. Flexible Budgets andStandard Costs Chapter 24

    2. Objectives Prepare a flexible budget for the income statement Use the flexible budget to show why actual results differ from the static budget Identify the benefits of standard costs and learn how to set standards Compute standard cost variances for direct materials and direct labor Analyze manufacturing overhead in a standard cost system Record transactions at standard cost and prepare a standard cost income statement

    3. Static Budgets

    4. Static Budgets

    5. Static versus Flexible Budgets

    6. Flexible Budgets

    7. Flexible Budgets

    8. Graphing the FlexibleBudget Formula

    9. Graphing the FlexibleBudget Formula

    10. Oasis Pools Performance Report

    11. Oasis Pools Performance Report

    12. The Flexible Budgetand Variance Analysis The flexible budget variance is the difference between what the company spent at the actual level of output and what it should have spent to obtain the actual level of output. It highlights the difference between actual costs and flexible budget costs.

    13. The Flexible Budgetand Variance Analysis Oasis Pools actually incurred $105,000 of variable costs to install the 10 pools. This was $1,250 more than the $103,750 budgeted variable cost for 10 pools. Oasis Pools also spent $2,000 more than budgeted on fixed expenses ($14,000 – $12,000).

    14. How do managers develop flexible budgets? Standard Costing

    15. Benefits of Standard Costs They help managers plan by providing the unit amounts, which are the building blocks of budgeting. They help simplify record keeping. Standard costs are carefully predetermined costs. (price standards) Standard quantity often is referred to as the quantity that should have been used. (quantity standards)

    16. Direct Material Variances Price Variance measures how well the business keeps unit prices of materials and labor within standards. Efficiency Variance measures whether the quantity of materials or labor used to make the actual number of outputs is within the budget.

    17. Price Variance... …is the difference between the actual price and standard price of inputs used multiplied by the actual quantity of inputs. Price variance = (Actual quantity × Actual price) – (Actual quantity × Standard price) or... Actual quantity × (AP – SP)

    18. Efficiency Variance... …is the difference between the actual and standard quantity of inputs allowed multiplied by the standard price of input. Efficiency variance = (Actual quantity × Standard price) – (Standard quantity × Standard price) or... Standard price × (AQ – SQ)

    19. Example of Standard Costing

    20. Materials Variances

    21. Materials Variances

    22. Direct Labor Variances Price Variance measures how well the business keeps unit prices of materials and labor within standards. Qty x (AP –SP) Efficiency Variance measures whether the quantity of materials or labor used to make the actual number of outputs is within the budget. Standard Price x (AQ – SQ)

    23. Labor Variances

    24. Labor Variances

    25. Flexible Budget Variancesfor Materials and Labor

    26. Manufacturing Overhead Variances The flexible budget variance for manufacturing overhead shows whether managers are keeping total overhead costs within the budgeted amount for the actual production of the period. The production volume variance arises when actual production differs from the level in the static budget.

    27. Allocating Overhead to Production Oasis Pools allocates manufacturing overhead to production based on standard direct labor hours for the actual number of outputs. The static budget, which is based on expected output of 8 pools, is known at the beginning of the period.

    28. Allocating Overhead to Production

    29. Allocating Overhead to Production In a standard cost system, manufacturing overhead is allocated to production based on a predetermined overhead rate. Most companies base their predetermined overhead rates on amounts from the static (master) budget which is known at the beginning of the year.

    30. Allocating Overhead to Production

    31. Allocating Overhead to Production

    32. Total ManufacturingOverhead Variance... …is the amount of underallocated or overallocated manufacturing overhead. This is the difference between actual manufacturing overhead and allocated manufacturing overhead.

    33. Total ManufacturingOverhead Variance

    34. Total Manufacturing Overhead Variance The total manufacturing overhead variance is split into the manufacturing overhead flexible budget variance and the production volume variance. Overhead flexible budget variance is the difference between actual overhead and the flexible budget overhead. Production volume variance is the difference between flexible budget overhead for actual output and standard overhead allocated for actual output

    35. Overhead Flexible Budget Variance

    36. Production Volume Variance... is the difference between the overhead cost in the flexible budget for actual production and the standard overhead allocated to production. 4,000 × $3.75 = $15,000 standard allocated for fixed overhead How much is the volume variance?

    37. Total Overhead Variances

    38. Flexible Budget Variance

    39. Total Variances Why was actual income $3,250 less than the flexible budget for 10 pools? Variable costs exceeded the flexible budget by $1,250 and actual fixed costs exceeded the static budget by $2,000.

    40. Standard Costs in the Accounts

    41. Standard Costs in the Accounts

    42. Standard Costs in the Accounts Notice that in these entries, the direct materials price variance is recorded at the time of purchase. An unfavorable variance has a debit balance which increases the expense. A favorable variance has a credit balance in the accounts and is a reduction in expenses.

    43. Standard Costs in the Accounts Manufacturing Overhead 21,820 Accounts Payable, Accumulated Depreciation, and Other accounts 21,820 To record actual overhead costs incurred

    44. Standard Costs in the Accounts

    45. Other Entries

    46. Closing Variances

    47. Closing Variances

    48. Standard Cost Income Statement for Management

    49. Standard Cost Income Statement for Management Closing the $250 net unfavorable variance to income summary increases the cost of goods sold to $119,000. This produces the $31,000 income figure.

    50. Review Flexible Budgets Standard Costing Direct Material Variances Direct Labor Variances Manufacturing Overhead Variances

    51. End of Chapter 24

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