Chapter 23
Flexible Budgets and Standard Costs
QUESTIONS
1. Fixed budget performance reports have limited usefulness because they do not reflect
2. The primary purpose of a flexible budget is to help managers better evaluate past
performance, which can improve their abilities to monitor and control operations.
3. The proper title is:
Spalding Company
Flexible Budget Performance Report
4. A flexible budget performance report is useful for an analysis of the difference between
5. A variable cost implies a constant per unit cost for each unit produced or sold within
the relevant range.
6. The human resource department is usually responsible for a labor rate variance. The
production department is usually responsible for a labor efficiency variance. However,
7. A price variance is that portion of a cost variance caused by a difference between the
actual unit price of an item and its standard price. A quantity variance is that portion of
Fundamental Accounting Principles, 21st Edition
1346
8. Standard costs are used to establish a basis to assess the reasonableness of actual
9. An overhead volume variance is the difference between (a) the amount of (fixed)
overhead that would have been budgeted at the actual operating level achieved during
10. A predetermined standard overhead rate is a measure computed and used in a standard
cost system to assign overhead costs to products. Before the period begins, budgeted
total overhead costs (variable and fixed) at the expected volume are divided by the
11. In general, variance analysis is said to provide information about price and quantity
variances.
12. A controllable variance is the difference between (a) the total overhead cost actually
incurred in the period and (b) the total overhead cost that would have been budgeted at
13. Standard costs provide a basis for evaluating actual performance. Summary
information comparing actual costs to budgeted costs is captured and reported in a
14. Before a period starts, the manager can prepare flexible budgets for the various types of
snowmobiles. Then, she could estimate both the best and worst case scenarios for the
15. Apple schedules appointments with customers to service Apple computers, iPhones,
iPods etc. These service appointments require standard hours at standard rates to
16. The controllable variance should not be affected by achieving an actual operating level
different from the budgeted level. If the company operated at 75% of capacity, a
controllable variance will arise only if the actual overhead cost is different from the
QUICK STUDIES
Quick Study 23-1 (15 minutes)
BEECH COMPANY
Flexible Budget Performance Report
For Month Ended May 31
Flexible
Actual
Budget
Results
Variances
Sales ………………………………………..…
$1,300,000
$1,275,000
$25,000
Variable costs …………………………..
750,000
712,500
37,500
Contribution margin ………………….…
550,000
562,500
12,500
Fixed costs ……………………………….…
300,000
300,000
0
Income from operations ………………
$ 250,000
$ 262,500
$12,500
Quick Study 23-2 (5 minutes)
A standard cost card for one bat would include:
Direct materials (1 kg. @$18 per kg.) ………………………………………..
$18
Direct labor (0.25 hours @$20 per hour) …………………………………...
5
Overhead (0.25 labor hours $40 per hour) ………………………………...
10
Total ………………………………………………………………………………………..
$33
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1348
Quick Study 23-3 (5 minutes)
Actual cost for one bat …………………………………………………………....
$40
Standard cost for one bat (from QS 23-2) ………………………………....
33
Cost variance …………………………………………………………………………..
$ 7
As the actual costs are greater than the standard costs, the cost variance is
unfavorable.
Quick Study 23-4 (10 minutes)
1. Management by exception involves managers focusing on the most
significant variances for analysis and action strategies. It also results in
2. Management often uses standard costs to compute these variances. Since
standard costs are used by managers to focus on the areas in which actual
Quick Study 23-5 (10 minutes)
Standard direct materials cost ………………………………………………....
$150,000
Materials price variance (favorable) ………………………………………....
(12,000)
Materials quantity variance (favorable) ……………………………………..
(2,000)
Actual total direct materials cost ……………………………………………...
$136,000
Quick Study 23-6 (10 minutes)
Standard direct labor cost ……………………………………………………….
$400,000
Labor rate variance (unfavorable) …………………………………………....
20,000
Labor efficiency variance (unfavorable) …………………………………...
10,000
Actual total direct labor cost …………………………………………………....
$430,000
Quick Study 23-7 (15 minutes)
Following information is given
Actual price per pound …………………………………………………………..…………
$ 78.00
Standard price per pound ……………………………………………………….
77.50
Material price variance per pound (unfavorable) ……………………..……
$ 0.50
It is also known that:
Material price variance = Price variance per pound x Actual pounds used
Therefore, substituting with the information given above:
Quick Study 23-8 (10 minutes)
Standard overhead cost …………………………………………………………….……..
$225,000
Overhead volume variance (favorable) ……………………………………….……..
(20,000)
Overhead controllable variance (unfavorable) …………………………….……..
60,400
Actual total overhead cost ………………………………………………………………..
$265,400
Quick Study 23-9A (10 minutes)
Goods in Process Inventory …………………………………………….
225,000
Controllable Variance ……………………………………………….…….
60,400
Volume Variance …………………………………………………….
20,000
Factory Overhead ……………………………………………..…….
265,400
To apply overhead and to record overhead variances.
Quick Study 23-10 (10 minutes)
Actual variable overhead (4,700 x $4.15)* …………………………………………..
$19,505
Applied variable overhead (5,000 x $4.00)** …………………………….………..
20,000
Total variable overhead cost variance …………………………..…………………..
$ 495 F
*Actual machine hours x Actual variable overhead rate
**Standard machine hours x Standard variable overhead rate
Quick Study 23-11A (15 minutes)
Variable overhead spending and efficiency variances
Actual Overhead
AH x AVR
AH x SVR
Applied Overhead
SH x SVR
(4,700 x $4.15)
4,700 x $4.00
5,000 x $4.00
hours per hour
hours per hour
hours per hour
$19,505
$18,800
$20,000
$705 U
(Spending variance)
$1,200 F
(Efficiency variance)
Quick Study 23-13 (5 minutes)
Fixed costs (unchanged) ………………………………………………………..…………
$300,000
Variable costs [($246,000/24,000) x 20,000 units] …………………….…….
205,000
Total budgeted costs (flexible budget) ………………………………………………
$505,000
Quick Study 23-14 (10 minutes)
From the flexible budget at 20,000 units, compute the sales price and variable
costs per unit:
At a production level of 26,000 units:
Sales (26,000 x $20.00) ………………………………………………………………………
$520,000
Variable costs (26,000 x $4.00)………………………………………………..……..
104,000
Contribution margin ……………………………………………………………….…………
416,000
Fixed costs (unchanged) ………………………………………………………..…………
150,000
Income from operations ……………………………………………………………………
$266,000
Quick Study 23-15 (10 minutes)
BRODRICK COMPANY
Flexible Budget Performance Report
For Year Ended December 31
Flexible
Actual
Budget
Results
Variances
Sales (13,000 units) ………………….…
$520,000
$480,000
$40,000
U
Variable expenses ………………………
104,000
112,000
8,000
U
Contribution margin ……………………
416,000
368,000
48,000
U
Fixed expenses ………………………..…
150,000
145,000
5,000
F
Income from operations ………………
$266,000
$223,000
$43,000
U
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Quick Study 23-16 (10 minutes)
Direct materials price variance:
Actual cost of direct materials used (given) …………………………….…………
$535,000
Actual quantity used x Standard price (300,000 x $2) …………………………
600,000
Direct materials price variance (favorable) …………………………………………
$ 65,000
Direct materials quantity variance:
Actual quantity used x Standard price (300,000 x $2) …………………………
$600,000
Standard quantity x Standard price (60,000 x 4 x $2) ……………….…………
480,000
Direct materials quantity variance (unfavorable) ……………………..……
$120,000
Quick Study 23-17 (10 minutes)
Direct labor rate variance:
Actual hours x Actual rate per hour (65,000 x $15) …………………..………
$975,000
Actual hours x Standard rate per hour (65,000 x $14) …………………………
910,000
Direct labor rate variance (unfavorable) ………………………………….…………
$ 65,000
Direct labor efficiency variance:
Actual hours x Standard rate per hour (65,000 x $14) …………………………
$910,000
Standard hours x Standard rate per hour (67,000 x $14) ………….…………
938,000
Direct labor efficiency variance (favorable) ……………………………..…………
$ 28,000
Quick Study 23-18 (10 minutes)
Actual overhead incurred ……………………………………………………….
$262,800
Less: Applied overhead (based on flexible budget)
Variable overhead (110,000 x $1.40*) ………………………………………………
Fixed overhead (unchanged) ……………………………………………………….
Controllable overhead variance (favorable) …………………………….…………
154,000
124,000
$ 15,200
*$162,400/116,000 units = $1.40 variable overhead rate per unit
Quick Study 23-19 (10 minutes)
Actual overhead incurred ……………………………………………………….
$ 28,175
Less: Applied overhead (based on flexible budget)
Variable overhead (9,800 x $3.10) …………………………..…………….…………
Fixed overhead (unchanged) ……………………………………………………….
Controllable overhead variance (favorable) …………………………….…………
30,380
12,000
$(14,205)
Quick Study 23-20 (5 minutes)
Budgeted fixed overhead (at 12,000 units) …………………………………………
$12,000
Fixed overhead applied to production (9,800 x $1) …………………..………
Volume variance (favorable) …………………………………………………..…..
9,800
$ 2,200
Quick Study 23-21 (15 minutes)
Sales
Actual
Flexible Budget
Fixed Budget
Units
216,944
216,944
225,944
Price per
unit
$30,200
$30,000
$30,000
Total
dollars
(216,944 x $30,200)
(216,944 x $30,000)
(225,944 x $30,000)
$6,551,708,800
$6,508,320,000
$6,778,320,000
Fundamental Accounting Principles, 21st Edition
1354
EXERCISES
Exercise 23-1 (20 minutes)
Item
Cost
a. Bike frames
Variable
b. Screws for assembly
Variable
c. Repair expense for tools (If these costs are only remotely related
to volume, they may be better classified as fixed)
Variable
d. Direct labor (If employees receive monthly salaries, this cost would
be fixed)
Variable
e. Bike tires
Variable
f. Gas used for heating**
Variable
g. Incoming shipping expenses*
Variable
h. Taxes on property
Fixed
i. Office supplies (This item can be a variable cost, but it usually is
not because it doesn’t often change in direct proportion to changes in
the volume level)
Fixed
j. Depreciation on tools (If the company uses the units-of–
production method, the depreciation would be variable)
Fixed
k. Management salaries
Fixed
* Incoming shipping expenses are variable with respect to the number (volume) of
incoming shipments, not production.
** Gas used for heating is often a mixed cost rather than strictly variable.
Exercise 23-2 (30 minutes)
TEMPO COMPANY
Flexible Budgets
For Quarter Ended March 31, 2013
Flexible Budget
Flexible
Flexible
Flexible
Variable
Amount
per Unit*
Total
Fixed
Cost
Budget for
Unit Sales
of 6,000
Budget for
Unit Sales
of 7,000
Budget for
Unit Sales
of 8,000
Sales …………………………..
$400.00
$2,400,000
$2,800,000
$3,200,000
Variable costs
Direct materials …………….
40.00
240,000
280,000
320,000
Direct labor ……………….….
70.00
420,000
490,000
560,000
Production supplies ….….
25.00
150,000
175,000
200,000
Sales commissions …..….
20.00
120,000
140,000
160,000
Packaging …………………….
22.00
132,000
154,000
176,000
Total variable costs …..….
177.00
1,062,000
1,239,000
1,416,000
Contribution margin ……….
$223.00
1,338,000
1,561,000
1,784,000
Fixed costs
Plant manager salary …….
$ 65,000
65,000
65,000
65,000
Advertising ……………….….
125,000
125,000
125,000
125,000
Admin. salaries …………….
85,000
85,000
85,000
85,000
Depr.—Office equip. ….….
35,000
35,000
35,000
35,000
Insurance ………………….….
20,000
20,000
20,000
20,000
Office rent …………………….
36,000
36,000
36,000
36,000
Total fixed costs ……….….
$366,000
366,000
366,000
366,000
Income from operations …….
$ 972,000
$1,195,000
$1,418,000
* Equals total variable costs divided by the volume of 7,000 units.
Fundamental Accounting Principles, 21st Edition
1356
Exercise 23-3 (25 minutes)
SOLITAIRE COMPANY
Flexible Budget Performance Report
For Month Ended June 30
Flexible
Actual
Budget
Results
Variances
Sales (10,800 units) …………………….
$540,000
$540,000
$ 0
Variable expenses ………………………
378,000
351,000
27,000
Contribution margin ……………………
162,000
189,000
27,000
Fixed expenses …………………………..
21,000
27,000
6,000
Income from operations ………………
$141,000
$162,000
$21,000
Supporting computations
Total fixed budget sales …………………………..
$ 420,000
Total fixed budget units …………………………..
÷ 8,400
Budgeted selling price…………………………….…………………..
$50 per unit
Flexible budget units …………………………………………………..
× 10,800
Flexible budget sales …………………………………………………..
$ 540,000
Total fixed budget variable expenses …………………………..
$ 294,000
Total units budgeted ……………………………….…………………..
÷ 8,400
Budgeted variable expenses …………………………..
$35 per unit
Flexible budget units …………………………………………………..
× 10,800
Flexible budget variable expenses …………..………………
$ 378,000
Total actual expenses ……………………………..…………………..
$ 378,000
Less actual fixed expenses ……………………..……
27,000
Total actual variable expenses ………………..…………
$ 351,000
Exercise 23-4 (25 minutes)
BAY CITY COMPANY
Flexible Budget Performance Report
For Month Ended July 31
Flexible
Actual
Budget
Results
Variances
Sales (7,200 units)……………………….
$720,000
$737,000
$17,000
F
Variable expenses ………………………
468,000
483,000
15,000
U
Contribution margin ……………………
252,000
254,000
2,000
F
Fixed expenses …………………………..
160,000
158,000
2,000
F
Income from operations ………………
$ 92,000
$ 96,000
$ 4,000
F
Supporting computations
Total fixed budget sales …………………………..
$ 750,000
Total units budgeted …………………………………………..
÷ 7,500
Budgeted selling price ………………………..…
$100 per unit
Flexible budget units …………………………..
× 7,200
Flexible budget sales …………………………..
$ 720,000
Total fixed budget variable expenses …..……………..
$ 487,500
Total units budgeted …………………………………………..
÷ 7,500
Budgeted variable expenses ………………..…………
$ 65 per unit
Flexible budget units …………………………..
× 7,200
Flexible budget variable expenses ……….……………..
$ 468,000
Total actual expenses …………………………..
$ 641,000
Less actual fixed expenses ………………….……….
158,000
Total actual variable expenses …………….…………….
$ 483,000
Exercise 23-5 (30 minutes)
1.
October variances
Preliminary computations
Actual hours: 16,250 hours (given)
Standard hours: 5,600 units x 3 hrs./unit = 16,800 hrs.
Direct labor cost variances
Actual units at actual cost [16,250 hrs. @ $15.20] ……………………….….
$247,000
Standard units and standard cost [16,800 hrs. @ $15.00] …………………………..
252,000
Direct labor cost variance ………………………………………………………….……………..
$ 5,000 F
Rate and efficiency variances
Actual Cost
AH x AR
AH x SR
Standard Cost
SH x SR
16,250 x $15.20
16,250 x $15.00
16,800 x $15.00
hours per hour
hours per hour
hours per hour
$247,000
$243,750
$252,000
$3,250 U
(Rate variance)
$8,250 F
(Efficiency variance)
$5,000 F
(Total labor variance)
Alternate solution format
Rate variance
= AH x (AR – SR)
= 16,250 hours x ($15.20 – $15.00) per hour
= 16,250 hours x $0.20 per hour
= $3,250 U
Efficiency variance
= (AH – SH) x SR
= (16,250 – 16,800) hours x $15.00 per hour
= (-550 hours) x $15.00 per hour
= $8,250 F
Rate variance ……………..…..
$3,250 U
Efficiency variance ……..…..
8,250 F
Total …………………………..
$5,000 F
Exercise 23-5 (Concluded)
November variances
Preliminary computations
Actual hours: 22,000 hours (given)
Direct labor cost variances
Actual units at actual cost [22,000 hrs. @ $15.25] …………………………..
$335,500
Standard units at standard cost [18,000 hrs. @ $15.00] …………………………..
270,000
Direct labor cost variance ……………………………………………………….
$ 65,500 U
Rate and efficiency variances
Actual Cost
AH x AR
AH x SR
Standard Cost
SH x SR
22,000 x $15.25
22,000 x $15.00
18,000 x $15.00
hours per hour
hours per hour
hours per hour
$335,500
$330,000
$270,000
$5,500 U
(Rate variance)
$60,000 U
(Efficiency variance)
$65,500 U
(Total labor variance)
2.
The unfavorable labor rate variance in October means the actual rate for an
hour of labor is greater than budgeted. The favorable labor efficiency
variance means the actual hours used are less than budgeted. Together,