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Chapter 21 Flexible Budgets and Standard Costing
Chapter 21
• Folsom Custom Skis: NEW opener with new entrepreneurial assignment
• New discussion on budgeting for service providers
• Revised several exhibits for learning clarity
• Revised discussion of predicting activity levels
or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website, in whole or part. 21-3
a. Develop budget from planned objectives.
b. Compare actual results to budgeted amounts; analyze differences.
c. Take corrective and strategic actions.
d. Establish new planned objectives and prepare new budget.
B. Fixed Budget Performance Report
2. Fixed budget (also called static budget) is based on a single predicted
amount of sales or production volume.
3. Fixed budget performance report compares actual results with results
a. Favorable variance (F)⎯actual revenue is greater than budgeted
revenue, or actual cost is lower than budgeted cost.
b. Unfavorable variance (U)⎯actual revenue is lower than budgeted
revenue, or actual cost is greater than budgeted cost.
C. Budget Reports for Evaluation
2. Fixed budget reports show variances from budget, but manager
doesn’t know if a change in sales volume (or other activity level) is the
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale
or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website, in whole or part. 21-4
management evaluate past performance.
4. 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
B. Preparation of Flexible Budgets
1. Designed to reveal effects of volume on revenue and costs.
2. Must rely on distinctions between fixed and variable costs.
changes in level of activity within relevant (normal) operating
range.
c. Note that some costs are neither strictly variable or strictly fixed;
however, assumption here is that all costs can be reasonably
classified as either variable or fixed within a relevant range.
costs⎯difference between sales and variable costs equals contribution
margin.
a. First column (see Exhibit 21.3) shows flexible budget amounts of
computed for specified sales volumes (three different sales
volumes used in this example).
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale
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variance in total dollar sales must have resulted from a selling
price that was different than expected.
b. Difference between actual quantity of input used and budgeted
quantity can be described as a quantity variance.
price per unit of input can be described as a price variance.
III. Section 2: Standard Costs are preset costs for delivering a product or service
expected under normal conditions.
1. Established through personnel, engineering, and accounting studies
the most significant differences between actual and standard costs
and give less attention to areas where performance is close to
standard. This is useful when directed at controllable items which
enables top management to affect the actions of lower-level managers
responsible for the company’s revenues and costs.
5. Standard costs can also help control nonmanufacturing costs.
A. Materials and Labor Standards⎯Historical costs are dollar amounts paid
by company in past transactions; a measure of comparison is usually
needed to decide whether historical cost-based amounts are reasonable or
other managers help set standard costs.
b. To set direct labor costs - conduct time and motion studies for
each labor operation in the process of providing product or
c. To set direct material costs – study quantity, grade, and cost of
each material used.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale
or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website, in whole or part. 21-6
standard.
d. Standard cost card includes standard costs of direct materials, direct
actual and standard costs; can be favorable (if actual cost is less than standard
cost) or unfavorable (if actual cost is more than standard cost). Note that short-
term favorable variances can lead to long-term unfavorable variances.
A. Cost Variance Analysis
b. Computation and analysis of variances.
c. Identification of questions and their explanations.
d. Taking corrective and strategic action.
B. Cost Variance Computation⎯Cost variance (CV) equals difference
between actual cost (AC) and standard cost (SC).
1. AC = actual quantity (AQ) x actual price (AP), and SC = standard
quantity (SQ) times standard price (SP).
2. AQ is input (material or labor) used in manufacturing the quantity of
Chapter 21 Flexible Budgets and Standard Costing
Chapter Outline
V. Overhead Standards and Variances⎯A predetermined overhead rate is used
to assign standard overhead costs to products or services produced;
predetermined rate 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
1. Standard overhead costs are amounts expected to occur at a certain
level of activity.
B. Predicting Activity Levels - to establish standard overhead cost rate, use
same cost structure as that used to construct flexible budget at end of a
period.
1. Management selects a level of activity (volume) and predicts total
overhead costs. It then divides this total by the allocation base to get
the standard rate.
2. Many factors affect predicted activity level.
difficulties in scheduling work, equipment under repair or
maintenance, and insufficient product demand.
standard rate.
C. Computing Overhead Cost Variances
1. Cost accounting system applies overhead using predetermined
variable and fixed overhead.
D. Controllable and Volume Variances
1. Controllable variance is the difference between actual overhead costs
incurred and budgeted overhead costs based on a flexible budget.
volume of production and standard volume of production based solely
on fixed overhead.
expected volume, and is computed based on standard direct labor
hours allowed for the expected production volume.
b. Applied fixed overhead is based on standard direct labor hours
Notes
b. AH = actual hours, AVR = actual variable overhead rate,
SH = standard hours, and SVR = standard variable overhead rate.
2. Fixed overhead cost variances can be determined by formulas that
include only the fixed portion of overhead.
a. Formulas:
identify what portion of the total overhead variance is caused by failing to
meet the expected production level.
G. Overhead Variance Reports – prepared to help management isolate the
reasons for overhead variances.
VII. Decision Analysis⎯Sales Variances⎯Similar to computation and analysis of
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale
or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website, in whole or part. 21-10
items differs from standard price.
3. Efficiency variance results when standard direct labor hours (the
incurred and budgeted overhead costs based on the flexible budget.
B. Standard Cost Accounting System
1. Many standard cost systems record standard costs and variances in
accounts.
2. Record standard materials costs incurred by debiting Goods in Process
Inventory, Direct Materials Price Variance (if unfavorable), Direct
favorable.
Factory Payroll; variances should be credited to related accounts if
favorable.
4. Assign standard predetermined overhead to cost of goods
Variance (if unfavorable), and crediting Factory Overhead; variances
should be credited to related accounts if favorable.
5. Accumulate balances in the six variance accounts until end of
a. If variance considered material, add to, or subtract from balances
of Goods in Process Inventory, Finished Goods Inventory, and
Cost of Goods Sold.
Chapter 21 Flexible Budgets and Standard Costing
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Chapter 21 – Alternate Demonstration Problem #1
XYZ Company manufactures tables. A standard cost card for the
manufacture of one table shows the following:
Standard Cost per Table:
Direct material: 4 sq. ft. @ $3/sq. ft.
$12
Direct labor: 2 hours @ $8/hr
16
Total prime costs
$28
In November, the company produced 1,000 tables. Actual production took
2,300 direct labor hours and 3,900 square feet of lumber. The lumber cost
$12,090 while the workers’ average pay was $7.80 per hour.
Required:
Calculate the price and quantity variances for direct material and direct
labor.
Chapter 21 Flexible Budgets and Standard Costing
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Solution: Chapter 21 Alternate Demonstration Problem #1
Material Variances:
Quantity Variance:
Standard units at standard price
4,000 ft @ $3.00 =
$12,000
Actual units at standard price
3,900 ft @ $3.00 =
11,700
Variance (favorable)
100 ft @ $3.00 =
$ 300
Price Variance:
Actual units at actual price
3,900 ft @ $3.10 =
$12,090
Actual units at standard price
3,900 ft @ $3.00 =
11,700
Variance (unfavorable)
3,900 ft @ $0.10 =
390
Direct material cost variance
(unfavorable)
$ 90
Labor Variances:
Efficiency (Quantity) Variance
Actual hours at standard rate
2,300 hrs. @ $8.00 =
$18,400
Standard hours at standard rate
2,000 hrs. @ $8.00 =
16,000
Variance (unfavorable)
300 hrs. @ $8.00 =
$2,400
Rate (Price) Variance:
Actual hours at standard rate
2,300 hrs. @ $8.00 =
$18,400
Actual hours at actual rate
2,300 hrs. @ $7.80 =
17,940
Variance (favorable)
2,300 hrs. @ $0.20 =
460
Direct labor cost variance
(unfavorable)
$1,940
