Chapter 21
Flexible Budgets and Standard Costs
QUESTIONS
1. Fixed budget performance reports have limited usefulness because they do not
reflect differences in revenues and variable costs that can occur simply because
actual volume is different from budgeted volume. This is a serious limitation when
evaluating (benchmarking) the reasonableness of actual revenues and costs.
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
For Year Ended December 31, 2019
The proper title communicates to the user the focus of the report. Although it may
seem obvious, many reports used in the business world do not have a proper or
descriptive title. The sooner a student begins to make this a routine task in
completing assignments, the better skilled s/he will be for the business world.
4. A flexible budget performance report is useful for an analysis of the difference
between actual performance and budgeted performance—often called variance
analysis. Its usefulness stems from the fact that both the budgeted and actual
results are based on the same level of activity.
5. A variable cost implies a constant per unit cost for each unit produced or sold within
8. Standard costs are used to establish a basis to assess the reasonableness of actual
costs. A comparison of standard costs to actual costs should help management
identify unexpected differences and then pursue explanations as to why actual costs
varied from the standard.
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 the period (that is, budgeted fixed overhead) and (b) the standard amount of
(fixed) overhead applied to actual products produced during the period. A volume
variance occurs when the actual volume differs from the expected volume that is
used to establish the predetermined rate.
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 expected amount of the allocation base (direct labor hours,
machine hours, or some other measure of activity). This yields the predetermined
standard overhead rate. Then as production activities occur, this predetermined
overhead rate is applied to the standard quantity of output produced to establish the
amount of overhead assigned to that output.
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 the actual operating level achieved. Specifically, the controllable variance is the
sum of the total variable overhead variances (both variable overhead spending and
efficiency variances) and the fixed overhead spending variance.
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
amount shown on a flexible budget for overhead computed at the 75% level.
In contrast, the volume variance is affected when the percent of actual capacity
differs from that expected. If the company operated at less than planned (for
example, at 75% instead of the 80% budgeted) the volume variance will be
unfavorable. This means that the company will not apply as much overhead to each
unit or job as planned. Stated differently, each job or unit will be undercosted.
17. Positive features of standard cost systems include: Provides benchmarks to be
used in management by exception; motivates employees to work towards goals;
standards are useful in the budgeting process; and standard cost systems can
isolate reasons for good or bad performance. Negative features of standard cost
systems include: Standards are costly to develop and keep up-to-date; variances are
not timely for adapting to rapidly changing business conditions; and employees
might strive only to meet the standard, not for continuous improvement.
QUICK STUDIES
Quick Study 21-1 (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
U
Variable costs …………………………..
750,000
712,500
37,500
F
Contribution margin …………………….
550,000
562,500
12,500
F
Fixed costs ………………………………….
300,000
300,000
0
Income from operations ………………
$ 250,000
$ 262,500
$12,500
F
Quick Study 21-2 (5 minutes)
Quick Study 21-3 (10 minutes)
From the flexible budget at 20,000 units, compute the sales price and variable
Quick Study 21-4 (10 minutes)
BRODRICK COMPANY
Flexible Budget Performance Report
For Year Ended December 31
Flexible
Actual
Budget
Results
Variances
Sales (26,000 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
Quick Study 21-5 (5 minutes)
A standard cost card for one bat would include:
Direct materials (1 kg @$18 per kg) ………………………………………….
Overhead (0.25 labor hours @$40 per hour) ……………………………..
Quick Study 21-6 (5 minutes)
Quick Study 21-7 (10 minutes)
$540,000
480,000
$ 60,000
U
Quick Study 21-8 (10 minutes)
Direct materials price variance:
Actual cost of direct materials used (given) ……………………………………….
$540,000
Direct materials price variance ……………………………………………………….
$ 60,000
F
Actual quantity used x Standard price (300,000 x $2) …………………………
Standard quantity x Standard price (60,000 x 4 x $2) ………………………….
Direct materials quantity variance ……………………………………………………..
U
Quick Study 21-9 (15 minutes)
Following information is given:
$ 78.00
77.50
$ 0.50
U
Quick Study 21–10 (10 minutes)
$150,000
(12,000)
F
(2,000)
F
$136,000
Quick Study 21–11 (10 minutes)
Direct labor rate variance:
Quick Study 21–12 (10 minutes)
Quick Study 21-13 (10 minutes)
$262,800
154,000
124,000
$ 15,200
F
*$162,400/116,000 units = $1.40 standard variable overhead rate per unit
Quick Study 21-14 (10 minutes)
Actual overhead incurred ……………………………………………………….
$ 28,175
30,380
12,000
$(14,205)
F
Quick Study 21–15 (5 minutes)
Budgeted fixed overhead (at 12,000 units) …………………………………………
Fixed overhead applied to production (9,800 x $1) …………………………..
Quick Study 21–16 (10 minutes)
Standard overhead cost ……………………………………………………….…………..
$225,000
Overhead volume variance ………………………………………………………………..
(20,000)
F
Overhead controllable variance ……………………………………………………….
60,400
U
Actual total overhead cost ………………………………………………………………..
$265,400
Quick Study 21–17A (10 minutes)
Quick Study 21–18 (10 minutes)
Actual overhead (4,700 x $4.15)*……………………………………………………….
$19,505
Applied overhead (5,000 x $4.00)** ……………………………………………………
20,000
Total overhead cost variance ……………………………………………………….
$ 495 F
*Actual machine hours x Actual overhead rate
**Standard machine hours x Standard overhead rate
Quick Study 21-19A (15 minutes)
Variable overhead spending and efficiency variances
Quick Study 21-20 (15 minutes)
Sales
Actual
Flexible Budget
Fixed Budget
Units
50
50
45
Quick Study 21-21 (15 minutes)
Sales
Actual
Flexible Budget
Fixed Budget
Units
182,158
182,158
191,158
Price per
unit
$30,200
$30,000
$30,000
Quick Study 21-22 (5 minutes)
1. Budgeted amount of direct materials = $9.25 x 1,200 = $11,100
Quick Study 21-23 (10 minutes)
a. Standard overhead rate before sustainability improvement:
$72,000 ÷ 2,000 = $36.00 standard overhead rate per return
Quick Study 21-24 (5 minutes)
a. 3 b. 2 c. 4 d. 1
EXERCISES
Exercise 21-1 (5 minutes)
Following management by exception, this company will focus on those
variances that exhibit differences of $400 or more from the standard. This
would include the controllable overhead variance ($400 unfavorable), the
direct materials quantity variance ($3,000 unfavorable) and the direct labor
efficiency variance ($2,200 favorable). Though the fixed overhead volume
variance is relatively large ($500 favorable), it merely shows the company
operated at a capacity level different than expected.
Exercise 21-2 (20 minutes)
Item
Cost
a. Bike frames
Variable
b. Screws for assembly
Variable
c. Direct labor (If employees receive monthly salaries, this cost would
be fixed)
Variable
e. Bike tires
Variable
Variable
Exercise 21-3 (30 minutes)
2. Total fixed costs = $366,000 (computed below)
4. Income from operations at sales of 8,000 units =
(8,000 x $400) – [$366,000 + (8,000 x $177)] = $1,418,000
TEMPO COMPANY
Flexible Budgets
For the First Quarter
Flexible Budget
Flexible
Flexible
Variable
Amount
per Unit*
Total
Fixed
Cost
Budget for
Unit Sales of
6,000
Budget for
Unit Sales
of 8,000
Sales …………………………..
$400.00
$2,400,000
$3,200,000
Variable costs
Direct materials ……………..
40.00
240,000
320,000
Direct labor ……………………
70.00
420,000
560,000
Production supplies ……….
25.00
150,000
200,000
Sales commissions ………..
20.00
120,000
160,000
Packaging ……………………..
22.00
132,000
176,000
Total variable costs ………..
Contribution margin ………..
$223.00
Fixed costs
Plant manager salary ……..
Advertising ……………………
125,000
125,000
Admin. salaries ………………
85,000
35,000
Insurance ………………………
20,000
Office rent ……………………..
36,000
36,000
Total fixed costs …………….
366,000
366,000
Exercise 21-4 (25 minutes)
XION COMPANY
Flexible Budget Performance Report
For Month Ended June 30
Flexible
Actual
Budget
Results
Variances
Sales (10,800 units) …………………….
$864,000
$885,000
$ 21,000
F
Variable expenses ………………………
378,000
351,000
27,000
F
F
Fixed expenses …………………………..
U
Exercise 21-5 (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
160,000
158,000
2,000
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 ………………………………………………..
Total actual variable expenses …………………………..
$ 483,000
Exercise 21-6 (15 minutes)
LEWIS CO.
Flexible Budget Performance Report
For Month Ended May 31
Flexible
Actual
Budget
Results
Variances
Exercise 21-7 (15 minutes)
1. Standard cost per unit:
$ 5
8
6
$19
2. Total budgeted cost = 12,000 units x $19 per unit = $228,000
Budgeted cost (from part 2) …………………………………………………….
Exercise 21-8 (10 minutes)
(1) The standard cost for one unit is computed as:
$ 48
32
24
$104
(2) Total cost variance
Actual costs incurred during the month:
$392,850
259,050
198,000
$849,900
Direct materials (8,000 x 6 lbs. x $8 per lb.) ………………………………………..
$384,000
Overhead (8,000 x 2 direct labor hours x $12 per hr.) …………………………
192,000
Total standard manufacturing costs ………………………………………………….
Total standard manufacturing costs ………………………………………………….
Total cost variance ……………………………………………………………………………
U
Exercise 21-9 (15 minutes)
Direct materials price variance:
$392,850
388,000
$ 4,850
U
Direct materials quantity variance:
Actual quantity used x Standard price (48,500 x $8.00) ………………………
Standard quantity x Standard price (48,000 x $8.00) …………………………..
Direct materials quantity variance ……………………………………………………..
$ 4,000
U
*8,000 units x 6 pounds per unit = 48,000 pounds
Exercise 21–10 (15 minutes)
Direct labor rate variance:
$259,050
251,200
$ 7,850
U
Direct labor efficiency variance:
$251,200
256,000
$ 4,800
F
**8,000 units x 2 hours per unit = 16,000 hours
Exercise 21-11 (25 minutes)
Part 1
Direct materials price variance:
Actual cost of direct materials used (138,000 x $3.75) ………………………..
Actual quantity used x Standard price (138,000 x $4.00) …………………….
552,000
Actual quantity used x Standard price (138,000 x $4.00) …………………….
Standard quantity x Standard price (135,000* x $4.00) ………………………..
540,000
Direct materials quantity variance ……………………………………………………..
$ 12,000
U
Exercise 21–11 (continued)
Part 2 Direct labor rate variance:
$468,100
465,000
$ 3,100
U
Direct labor efficiency variance:
$465,000
405,000
$ 60,000
U
**9,000 units x 3 hours per unit = 27,000 hours
Exercise 21-12 (25 minutes)
Part 1 Direct materials price variance:
$271,400
276,000
$ 4,600
F
Direct materials quantity variance:
Actual quantity used x Standard price (92,000 x $3.00) ………………………
$276,000
Direct materials quantity variance ……………………………………………………..
U
Actual hours x Actual rate per hour (18,800 x $12.05) …………………………
$226,540
Actual hours x Standard rate per hour (18,800 x $12.00) …………………….
225,600
Direct labor rate variance ……………………………………………………….
$ 940
U
Actual hours x Standard rate per hour (18,800 x $12.00) …………………….
$225,600
Standard hours x Standard rate per hour (18,000** x $12.00) ………………
216,000
Direct labor efficiency variance ……………………………………………………….
$ 9,600
U
Exercise 21–13 (30 minutes)
1. Preliminary computations
Actual quantity: 22,000 bd. ft. (given)
Standard quantity: 3,000 units x 8 bd. ft./unit = 24,000 bd. ft.
Actual price: $266,200/22,000 bd. ft. = $12.10/bd. ft.
Standard price: $12.00/bd. ft. (given)
Direct material cost variances
Actual units at actual cost [22,000 bd. ft. @ $12.10] …………………………..
$266,200
Standard units at standard cost [(24,000 bd. ft. @ $12.00] ………………….
288,000
Direct material cost variance ……………………………………………………….
$ 21,800 F
Price and quantity variances
Actual Cost
AQ x AP
AQ x SP
Standard Cost
SQ x SP
22,000 x $12.10
22,000 x $12.00
24,000 x $12.00
bd. ft. per bd. ft.
bd. ft. per bd. ft.
bd. ft. per bd. ft.
$2,200 U
2. The quantity variance is more than 5% of actual direct material cost and
thus it will be investigated further. ($24,000/$266,200 = 9.02%).