Survey of accounting 6e chapter 13

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Budgeting and Standard Cost

13

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Learning Objectives

After studying this chapter, you should be able to:

• Describe budgeting, its objectives, its impact on human

behavior, and types of budget systems

• Describe the master budget for a manufacturing company.

• Describe the types of standards and how they are established.

• Describe and illustrate how standards are used in budgeting

• Compute and interpret direct materials and direct labor

variances

• Describe and provide examples of nonfinancial performance

measures.

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Managerial Functions Affected

by Budgets

Exhibit 1: _

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Human Behavior and Budgeting

• Importance of setting a reasonable budget:

• Budgets set too tightly _ employees when expectations are too high.

• Budgets set too loosely lead to budgetary slack –

called “padding” the budget Employees may develop

a “spend it or lose it” mentality

• occurs when the employees’ or

managers’ self-interest differs from the company’s

objectives or goals.

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Continuous Budgeting Systems

• Continuous budgets maintain a _ into the future

Exhibit 3: Continuous Budgeting

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Developing Budget Estimates

• budgeting requires managers to estimate sales, production, and other data as though operations are being started for the first time.

• More common methods involve revising last year’s budget:

•

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Static and Flexible Budgets

• Static Budget: It is based

on _ activity level

and does not change if

circumstances change.

• Flexible Budget: It shows expected results

at activity levels.

Exhibit 4: Static Budget

Exhibit 5: Flexible Budget

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Flexible budgeting adjustments produce lower to-budget differences.

actual-No of units Produced

No of units Produced

Exhibit 6: Static and Flexible Budgets

Static and Flexible Budgets

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Learning

Objective 2

Describe the master budget for

a manufacturing company

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Relationship of the Various

Income Statement Budgets

Exhibit 7: Income Statement Budgets

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Production Budget

• Indicates the to meet budgeted sales and inventory level.

• Feeds the following budgets:

• budget – quantity of direct materials needed.

• budget – labor required for each unit

of product

• – estimated factory overhead costs

necessary for production.

Exhibit 9: Production Budget

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Direct Materials Purchases

Budget

Exhibit 10: Direct Materials Purchases Budget

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Direct Labor Cost Budget

Exhibit 11: Direct Labor Cost Budget

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Factory Overhead Cost Budget

Exhibit 11: Factory Overhead Cost Budget

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Exhibit 13: Cost of Goods Sold Budget

Cost of Goods Sold Budget

• Derived from the budgets.

• Needs the following information:

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Selling and Administrative

Expenses Budget

Exhibit 14: Selling and Administrative Expenses Budget

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Budgeted Income Statement

• Derived from the

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Budgeted Balance Sheet

Combines the following:

• Schedule of cash collections – projects cash inflows from sales.

• Schedule of cash payments – projects

Projects capital

spending needs over

the next five years

acquiring fixed assets)

Budget

(summarizes plans for

acquiring fixed assets)

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Capital Expenditures Budget

Exhibit 19: Capital Expenditures Budget

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Cash Collections from Sales

Exhibit 16: Schedule of Collections from Sales

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Cash Payments for Manufacturing Costs

Exhibit 16: Schedule of Collections from Sales

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Cash Budget

Exhibit 18: Cash Budget

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Budgeted Balance Sheet

• Estimates condition at the

end of a budget period.

• Assumes all other budgets are met.

• Similar to a balance sheet based on actual data.

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Learning

Objective 3

Describe the types of standards and how they are established

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Standards

• Standards are _ goals.

• Standard costs systems:

• Provide a measure for _.

• Allow measurement of variances from

_ goals.

• Standard setting involves the joint efforts of accountants, engineers, and other

management personnel.

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Other Issues with Standards

• Reviewing and Revising Standards

• Ensure _conditions are

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Learning

Objective 4

Describe and illustrate how standards are used in budgeting

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• Standard cost per unit

• Standard cost Standard Standard per unit = _ ×

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Using Standards

• We’ll illustrate the use of standards in

budgeting by examining Cowpoke Inc., a

manufacturer of blue jeans The standard

cost of size XL jeans is below.

Exhibit 20: Standards Cost for XL Jeans

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Budget Performance Report

• Assume the actual jeans sold were 5,000 pairs compared to the original budget of

6,000 pairs.

Exhibit 21: Budget Performance Report

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Budget Performance Report

Exhibit 21: Budget Performance Report

• Variance:

• Actual Cost < Standard Cost =

• Actual Cost > Standard Cost =

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Learning

Objective 5

Compute and interpret direct materials and direct labor variances

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Summary of Manufacturing

Cost Variances

Exhibit 22: Manufacturing Cost Variances

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Direct Materials Variances

• Direct Materials Price Variance

• Difference between the and the

multiplied by the

.

• Direct Materials Quantity Variance

• Difference between the and the

_(based on the actual production level) multiplied by the .

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Direct Materials Variances for

Cowpoke Inc.

Standard Price = $5 per yard Actual Price = $5.50 per yard

Standard Quantity = 7,500 yards Actual Quantity = 7,300 yards

(5,000 pairs * 1.5 yards/pair of jeans)

Standard Cost Actual Cost Variance

Direct Materials

Quantity Variance 7,500 yards × $5 per yard =

$37,500

7,300 yards × $5 per yard =

$36,500

$1,000 Favorable

Total Direct Materials Cost Variance = $2,650 Unfavorable

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Direct Materials Variances for

Cowpoke Inc.

Exhibit 23: Direct Materials Variance Relationships

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Direct Labor Variances

• Direct Labor Rate Variance

• Difference between the _and _ multiplied by the

_.

• Direct Labor Time Variance

• Difference between the _ and the _(based on the actual

production level) multiplied by the

_.

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Direct Labor Variances for

Cowpoke Inc.

Standard Rate = $9 per hour Actual Price = $10 per hour Standard Hours = 4,000 hours Actual Hours = 3,850

(5,000 pairs at 80 hours per pair)

Standard Actual Variance

Direct Labor

Rate Variance 3,850 hours × $9 per hour = $34,650 3,850 hours × $10 per hour =

$38,500

$3,850 Unfavorable

Direct Labor

Time Variance

4,000 hours × $9 per hour = $36,000

3,850 hours × $9 per hour =

$34,650

$1,350 Favorable

Total Direct Labor Cost Variance = $2,500 Unfavorable

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Direct Labor Variances for

Cowpoke Inc.

Exhibit 24: Direct Labor Variance Relationships

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Nonfinancial Performance

Measures

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Nonfinancial Performance

Measures

• Nonfinancial performance measures should be used in conjunction with financial measures to avoid

• Common examples:

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End of Chapter 13

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