23-1
CHAPTER 23
FLEXIBLE BUDGETS AND STANDARD COSTS
Related Assignment Materials
Student Learning Objectives
Discussion
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Define standard costs and
explain how standard cost
information is useful for
management by exception
8,13
23-2, 23-4
23-13, 23-15
23-7
23-1, 23-3,
23-5, 23-7,
23–8
C2. Describe variances and what
they reveal about performance.
5, 6, 7, 11, 14
23-3
23-14
23-5, 23-6
23-4, 23-6,
23-7
Analytical objectives:
A1. Analyze changes in sales from
expected amounts.
23-12, 23-21
23-12
24-4
23-2, 23-9
Procedural objectives:
P1. Prepare a flexible budget and
interpret a flexible budget
performance report.
1, 2, 3, 4
23-1, 23-13,
23-14, 23–15
23-1, 23-2,
23-3, 23-4
23-3, 23-4,
23-5
P2. Compute materials and labor
variances.
23-5, 23–6,
23-7, 23–16,
23–17
23-5, 23–8,
23–16
23-1, 23-4,
23-5, 23-6
P3. Compute overhead variances.
9, 10, 12, 13,
15, 16
23–8, 23–10,
23–11, 23-18,
23-19, 23–20
23-6, 23-7,
23–10, 23-11,
23-1, 23–2,
23-5, 23-6,
P4 Prepare journal entries for
standard costs and account for
price and quantity variances.
(Appendix 23A)
23-9
23-9
23-7
23-4
23-2
Additional Information on Related Assignment Material
Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be used
in practice, homework, or exam mode.
Corresponding problems in set B also relate to learning objectives identified in grid on previous page.
Problems 23-1A and 23-4A can be completed using EXCEL. The Serial Problem for Success Systems
starts in this chapter and continues throughout many chapters of the text. It is most readily solved
manually if you use the working papers that accompany text.
Narrated PowerPoint Correlation Guide
Slides
5-7
8-11
12-16
17-26
27-33
35-36
45-47
Synopsis of Chapter Revision
• Folsom Custom Skis: NEW opener with new entrepreneurial assignment
Chapter Outline
Section 1⎯Flexible Budgets
I. Budgetary Process
A. Budgetary Control and Reporting
1. Budgetary control⎯management’s use of budgets to monitor and
control the company’s operations.
2. Budget reports
a. Contain relevant information that compares actual results to
planned activities.
b. Sometimes viewed as progress reports (or report cards) on
management’s performance in achieving planned objectives.
3. Budgetary control process involves at least four steps.
a. Develop budget from planned objectives.
b. Compare actual results to budgeted amounts and analyze
B. Fixed Budget Performance Report
1. In fixed budgetary control system, master budget is based on single
prediction for sales volume (or other activity level).
2. A fixed budget (also called static budget) is based on a single
predicted amount of sales or production volume.
or other activity level). (Exhibit 23.2)
4. Differences between budgeted and actual results are designated as
variances.
C. Budget Reports for Evaluation
1. Primary use of budget reports is to help management monitor and
control operations.
2. Fixed budget reports show variances from budget, but manager
doesn’t know if a change in sales volume (or other activity level) is
cause for variances, or if other factors have influenced the amounts.
fixed budget reports to adjust for changes in activity levels.
Notes
Chapter Outline
Notes
II. Flexible Budget Reports –Superior alternative to fixed budget reports.
A. Purpose of Flexible Budgets
1. Flexible budget (also called variable budget) is based on predicted
amounts of revenues and expenses corresponding to actual level of
output.
2. Useful both before and after the period’s activities are complete
3. Flexible budgets prepared before the period are based on several levels
of activities. Include both best case and worst case scenarios
5. Especially useful because it reflects the different levels of activities in
a. Comparisons of actual results with budgeted performance are
more likely to identify reasons for any differences.
b. Helps managers to focus attention on problem areas and to
implement corrective actions.
B. Preparation of Flexible Budgets
1. Designed to reveal effects of volume of activity on revenue and costs.
2. Must rely on distinctions between fixed and variable costs.
a. Variable cost per unit of activity remains constant; total amount of
c. Note that some costs are neither strictly variable nor strictly fixed;
however, assumption here is that all costs can be reasonably
classified as either variable or fixed within a relevant range.
3. When numbers making up a flexible budget are created:
costs⎯difference between sales and variable costs equals
contribution margin.
b. First column shows flexible budget amounts of variable costs per
computed for specified sales volumes (three different sales
volumes used in this example).
Chapter Outline
C. Flexible Budget Performance Report
1. Lists differences between actual performance and budgeted
performance based on actual sales volume (or other level of activity).
2. Helps direct management’s attention to those costs or revenues that
differ substantially from budgeted amounts; areas where corrective
actions may help management control operations.
3. Used for variance analysis.
a. Actual and budgeted sales volumes are the same; as such, any
variance in total dollar sales must have resulted from a selling
price that was different than expected.
price per unit of input can be described as a price variance.
c. Difference between actual quantity of input used and budgeted
quantity can be described as a quantity variance.
significant differences and give less attention where performance is
reasonably close to standard.
4. Can also help control nonmanufacturing costs.
II. Materials and Labor Standards
1. Managerial accountants, engineers, personnel administrators, and other
managers help set standard costs.
a. To set direct labor costs – conduct time and motion studies for
normal conditions.
b. To set direct material costs – study quantity, grade, and cost of
each material used.
Notes
Chapter Outline
2. Regardless, actual costs frequently differ from standard costs;
differences often due to more than one factor.
a. Actual quantity used (of direct labor hours or direct materials) may
differ from standard.
b. Actual price paid per unit (of direct labor or direct materials) may
differ from standard.
B. Setting Standard Costs
1. Due to inefficiencies and waste, materials may be lost as part of
process.
standard.
2. A standard cost card shows the standard costs of direct materials,
.
III. Cost Variances⎯Cost variance (or simply variance) is difference between
term favorable variances can lead to long-term unfavorable variances.
A. Cost Variance Analysis
1. Variances are commonly identified in performance reports.
2. Management examines circumstances to determine factors causing the
a. Preparation of standard cost performance report.
b. Computation and analysis of variances.
c. Identification of questions and their explanations.
d. Corrective and strategic action.
B. Cost Variance Computation⎯Cost variance (CV) equals difference
between actual cost (AC) and standard cost (SC).
1. Actual quantity (AQ ) Standard quantity (SQ)
x Actual price (AP) x Standard price (SP)
3. Actual Price is amount paid for acquiring the input (material or labor),
and Standard Price is the expected price.
Notes
4. Two main factors cause a cost variance
a. Price variance caused by difference between actual price paid and
standard price.
b. Quantity (or usage or efficiency) variance caused by difference
between the actual quantities of materials or hours used and the
standard quantity.
5. Price variance and quantity variance can be determined by formulas.
Actual Cost Standard
AQ x AP AQ x SP SQ x SP
Cost variance
2. Alternative price variance and quantity variance formulas can also be
C. Computing Materials and Labor Variances
1. Material cost variances may be due to price and/or quantity factors.
usually responsible. Can also be fault of purchasing department if
the purchase of inferior materials caused excess use of materials.
2. Labor cost variances may be due to rate (price) and/or efficiency
(quantity) factors.
used differ from the standard quantity of hours allowed to produce
the actual amount of output; production manager needs to explain
why the actual hours were different from standard.
c. Labor rate and efficiency variances may be due to use of workers
with different skill levels.
Chapter Outline
IV. Overhead Standards and Variances⎯A predetermined overhead rate is used
to assign standard overhead costs to products or services produced;
predetermined rate is often based on relation between standard overhead and
standard labor cost, standard labor hours, standard machine hours, or another
measure of production.
A. Setting Overhead Standards
level of activity.
4. To establish standard overhead cost rate, use same cost structure as
that used to construct flexible budget at end of a period.
a. Management selects a level of activity (volume) and predicts total
overhead costs.
b. Many factors affect predicted activity level.
i. Level of 100% of capacity rarely used.
ii. Factors that cause activity level to be less than full capacity
include difficulties in scheduling work, equipment under
repair or maintenance, and insufficient product demand.
3. Actual overhead costs incurred (AOI)
– Standard overhead applied (SOA)
Overhead Cost Variance (OCV)
4. The standard overhead applied is based on the predetermined overhead
Actual total Overhead – Standard total overhead applied
Notes
23-9
Chapter Outline
5. To help identify factors causing the overhead cost variance managers
will analyze the variance separately for controllable and volume
variances.
a. The controllable variance is the difference between the actual
overhead costs incurred and the budgeted overhead costs based on
a flexible budget; named because it refers to activities usually
under management control.
b. The volume variance is the difference between the budged fixed
overhead (at predicted capacity) and the applied fixed overhead).
i. Occurs when there is a difference between the actual volume
the total overhead variance is cause by failing to meet the expected
production level.
e. Often the reasons the failing to meet expected operating levels are
due to factors (e.g. customer demand) beyond employees’ control.
f. Overhead Variance Reports
mix of products.
2. Sales quantity variance is difference between total actual and total
budgeted quantity of units sold.
Notes