Ch 8 - Flexible Budgets and Standard Costing Flashcards
What is the preparation of a master budget based on?
predicted level of activity (such as sales volume)
define budgetary control
management use of budgets to monitor and control company operations
define budget reports
report comparing actual results to planned objectives; sometimes used as a progress report
what is the budget report comparison motivated by?
need to both monitor performance and control activities
What are the minimum four steps of budgetary control process?
- develop the budget from planned objectives
- compare actual results to budgeted amounts and analyze any differences
- take corrective and strategic actions
- establish new planned objectives and prepare new budget
In a fixed budgetary control system, what is the master budget based on?
- based on a single prediction for sales volume or other activity level
- budgeted amount for each cost assumes that specific/fixed amount of sales will occur
define fixed budget or static budget
based on a single predicted amount of sales or other measure of actvity
define fixed budget performance report
report that compares actual revenues and costs with fixed budgeted amounts and identifies the differences as favorable or unfavorable variances
define favorable variance
when compared to budget, the actual cost or revenue contributes to a higher income
Ie: actual revenue is higher than budgeted income, or actual cost is lower than budgeted cost
define unfavorable variance
when compared to budget, actual cost or revenue contributes to lower income,
IE: actual revenue is lower than budget revenue, actual cost is higher than budgeted cost
define flexible budget or variable budget
budget prepared (using actual volume) once a period is complete that helps managers evaluate past performance; uses fixed and variable costs in determining total costs
are flexible budgets based off of one or multiple scenarios
often best & worst scenarios
What does the analysis of flexible budgets allow management to do?
to make adjustments to avoid or lessen the effects of the worst case scenario
how does a flexible budget yield an apples to apples comparison
because budgeted activity levels are same as actual levels
what is a flexible budget designed to do?
reveal effects of volume of activity on revenues and costs
what distinctions does management rely on when preparing flexible budgets
distinctions between fixed and variable costs
does the cost per unit of activity remain constant or changes in direct proportion to a change in activity level
remains constant
What are the two ways a variable cost is expressed in a flexible budget
- constant amount per units of sales
2. percent of a sales dollar
how is a fixed cost expressed in a flexible budget
total amount expected to occur at any sales volume w/in relevant range
what is a contribution margin format for flexible budget layouts?
- format beginning with sales followed by variable costs and then fixed costs
- both expected individual and total variable costs are reported and then subtracted from sales
- difference between sales and variable costs equals contribution margin
- expected amts of fixed costs listed next
- expected income from ops before taxes
define flexible budget performance report
report the compares actual revenues and costs with their variable budgeted amounts based on actual sales volume (or other level of activity) and identifies the differences as variances
define price variance
difference between actual and budgeted revenue or cost caused by difference between the actual price per unit and budgeted price per unit
define quantity variance
difference between actual and budgeted revenue or cost caused by difference between actual number of units and budgeted number of units
define variance analysis
process of examining differences between actual and budgeted revenues or costs and describing them in terms of price and quantity differences
What is the main difference between fixed and flexible budgets
A fixed budget is prepared using an expected volume of sales or production. A flexible budget is prepared using the actual volume of activity.
How can you identify standards for direct labor costs?
- conduct time and motion studies for each labor operation in the process of providing a product or service
- from studies, mgmt learns best way to perform operation and set standard labor time required for operation under normal conditions
How are standards costs set for materials?
studying quantity, grade and cost of each material used
what word is generally used in business practice when speaking of total amounts
budget
what word is generally used in business practice when discussing per unit amounts
standard
define ideal standard
quantity of material/labor required if process is 100% efficient w/out any loss or waste
define practical standard
quantity of material required under normal application of the process
what factors are considered when determining standard price
- quality of materials
- future economic conditions
- supply factors (shortages and excesses)
- any available discounts
- amount of labor time (after including allowances) required to manufacture product
define standard cost card
card showing standard cost of direct materials, direct labor and overhead
define cost variance or variance
difference between the actual incurred cost and the standard cost
can a cost variance be favorable or unfavorable
yes
when is a variance from standard cost considered favorable
if actual cost is less than standard cost
when is a variance from standard cost considered unfavorable
if actual cost is more than standard cost
what are the four steps in effective mgmt of variance analysis
- preparing standard cost performance report
- computing and analyzing variances
- identifying questions and their explanations
4 taking corrective and strategic actions
cost variance (CV) equation in simple format
CV = actual cost (AC) - standard cost (SC)
Notes:
AC = Actual quantity (AQ) * Actual Price (AP)
SC = Standard Quantity (SQ) * Standard Price (SP)
Actual Cost (AC) formula and what is it
actual quantity X actual price
Note: the input (material or labor) used to manufacture the quantity of output
standard cost (SC) and what is it
standard quantity (SQ) x Standard price (sp)
note: the expected input for the quantity of ouput
what is the actual price?
amount paid to acquire the input (material or labor)
what are price and quantity variances for direct labor usually referred to as?
rate and efficiency variances, respectively
what are the two main factors for a cost variance?
- difference between actual price and standard price results in a price (or rate) variance
- difference between actual quantity and standard quantity results in a quantity (or usage or efficiedncy) variance
Formula for Cost Variance or Total Variance
Price Variance (PV) + Quantity Variance (QV)
Note: PV = (AQ * AP) - (AQ * SP) QV = (AQ * SP) - (SQ * SP) AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
Formula for Price Variance with four factors
(AQ * AP) - (AQ * SP)
Note: AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
Formula for Quantity Variance with four factors
(AQ * SP) - (SQ * SP)
AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
When computing a price variance, what is held constant?
actual quantity
When computing a quantity variance, what is held constant?
standard price
Price variance formula with three factors
(AP - SP) * AQ
Note: AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
Quantity variance formula with three factors
(AQ - SQ) * SP
Note: AQ = actual quantity AP = actual price SP = standard price SQ = standard quantity
What is the first step to mgmt finding info about factors causing a cost variance?
first properly compute the variance
What can the labor cost variance be divided into?
rate (price) variance and efficiency (quantity) variance
Formula for actual labor cost
AH * AR
Note:
AH = Actual Direct Labor Hours
AR = Actual Wage Rate
Formula for standard labor cost
SH * SR
Note:
SH = Standard Direct Labor Hours for Actual Output
SR = Standard Wage Rate
How find the Actual Hours at Standard Rate to compute variance from standard cost
AH * SR
Note:
AH: Actual Direct Labor Hours
SR: Standard Rate (wage)
Formula for computing rate variance in labor hours
AC - (AH * SR)
Note: AH = Actual Direct Labor Hours AR = Actual Wage Rate SH = Standard Direct Labor Hours for Actual Output SR = Standard Wage Rate
Formula for labor efficiency variance
(AH * SR) - Standard Cost
Note: Standard Cost = SH * SR AH = Actual Direct Labor Hours AR = Actual Wage Rate SH = Standard Direct Labor Hours for Actual Output SR = Standard Wage Rate
Formula for Total Direct Labor Variance
Rate Variance - Efficiency Variance
Note: AH = Actual Direct Labor Hours AR = Actual Wage Rate SH = Standard Direct Labor Hours for Actual Output SR = Standard Wage Rate
When standard costs are used, why are predetermined overhead rates also used?
to assign standard overhead costs to products or services produced
What is the standard predetermined overhead rate often based on?
an allocation base, such as standard labor cost, standard labor hours, stadard machine hours
How does the average overhead cost per unit relate to changes in predicted volume?
average overhead cost changes w/changes in predicted volume
how are standard overhead costs measured
average per unit costs based on predicted activity level
What are the 4 general steps to establishing the standard overhead cost rate
- use same cost structure used to construct flexible budget at end of period
- identify the diff overhead cost components and classify each as variable or fixed
- select level of activity (volume) and predict total OH cost
- divide total by allocation base to get standard rate
What happens with variable costs, fixed costs, average total OH cost per unit with increases in volume?
- variable costs per unit remain constant
- fixed costs per unit decline
- average total OH cost per unit declines
What are factors that prevent the activity level from being less than full capacity?
- difficulties in scheduling work
- equipment under repair
- maintenance
- insufficient product demand
define overhead cost variance
difference between total overhead cost applied to products and total overhead cost actually incurred
overhead cost variance formula (OCV)
OCV = AOI - SOA
Note:
AOI: actual overhead incurred
SOA: standard overhead applied
what is the standard overhead applied based on?
based on predetermined overhead rate and the standard number of hours that should have been used, based on actual production
what do managers analyze to identify factors causing the overhead cost variance
analyze the variance separately for controllable and volume variances
define controllable variance
combination of both overhead spending variances (variable and fixed) and the variable overhead efficiency variance
define volume variance
difference between two dollar amounts of fixed overhead cost,
one amount is total budgeted overhead cost,
and other is overhead cost allocated to products using predetermined fixed overhead rate
Does the budgeted fixed overhead amount change with increases or decreases in volume
no, it will stay the same
what is the computation for budgeted fixed overhead amount based on?
based on standard direct labor hours that the budgeted production volume allows
what is the applied fixed overhead based on
standard direct labor hours allowed for the actual volume of production, using the flexible budgeyt
formula for fixed overhead rate
fixed OH $ / budgeted DL hours
formula for variable OH rate
variable OH $ / budgeted DL hours
