Dr. M. D. Chase Long Beach State University Acct 310 70-A Flexible Budgets and Standard Costing Page 1 I. Flexible (Variable) Budgets A. Budgets that can be adjusted for changes in the level of activity encountered by the firm (as opposed to static budgets that are only useful only at a fixed (static) level of activity. 1. Flexible budgets are used in conjunction with static budgets to identify: a. sales volume variance: the difference in operating income (net income) between the flexible-budget amounts and the static (master) budget amounts while holding selling prices and variable costs constant; b. flexible budget variance:the difference between actual operating income (net income) and flexible budget operating income; Flexible-budget Variance = Actual Operating Income - Flexible-budget Operating Income 2. When using these variances to evaluate managerial performance it is important to distinguish between: a. Effectiveness:the degree to which a manager has achieved a predetermined objective b. Efficiency: the degree to which a manager maximizes outputs with a given number of inputs II. STANDARD COSTING A. A flexible-budgeting system that utilizes predetermined per unit standard costs for Direct Material (DM) Direct Labor (DL) and Variable OverHead (VOH) Direct Material Format Actual Costs incurred Flexible-budget based on Flexible-budget based on Flexible-budget based on For purchases Act purchases @ Std $ Act Qty produced@ Std $ Std input allowed for and Std $ Act output @ Std $ (Act Qty Purchased)(Act $) (Act Qty Purchased)(Std $) (Act Qty used)(Std $) (Std Qty for units produced)(Std $) Price Variance Efficiency Variance ∆ $ (Act Q) ∆ Q (Std $) Direct Labor and Variable Overhead Format Actual Costs Incurred Flexible-budget based on Flexible-budget based on Act Qty used in production Std input allowed for Act output @ Std $ (Act Qty)(Act $) (Act Qty)(Std $) (Std $)(Std Qty) Price Variance Efficiency Variance ∆ $ (Act Q) ∆ Q (Std $) Sales Volume Variance = (Flexible-budget units sold - master-budget units sold)(budgeted UCM) Note: All variances must be labeled as favorable (F) or unfavorable (U)Dr. M. D. Chase Long Beach State University Acct 310 70-A Flexible Budgets and Standard Costing Page 2 Fixed Overhead Format Actual Costs Incurred Flexible-budget Master (Static) Budget Act output x Application Rate Sales Flexible-budget Variance Volume Variance Master-budget Variance B. Standard Costing Journal Entries Record Direct Materials Purchased and Isolate DM Variances: Stores (Act Q purchased)(Std $)........................... xxxx DM $ Variance (U) [ ∆ $ (Act Q)] ..................... UUUU* DM $ Variance (F) [ ∆ $ (Act Q)] ..................... FFFF* Accounts payable (Act Q)(Act $)........................ xxxx Record Direct Materials Used In Production: Work in process (Std Q for units produced)(Std $).......... xxxx DM Efficiency Variance (U) [ ∆ Q (Std $)] ................ UUUU* DM Efficiency Variance (F) [ ∆ Q (Std $)] ............. FFFF* Stores (Act Q used in production)(Std $)................ xxxx Record Direct Labor Cost and Isolate DL Variances: Work in process (Std Q for units produced)(Std $).......... xxxx DL $ Variance (U) [ ∆ $ (Act Q)] ........................ UUUU* DL Efficiency Variance (U) [ ∆ Q (Std $)] ................ UUUU* DL $ Variance (F) [ ∆ $ (Act Q)] ..................... FFFF* DL Efficiency Variance (U) [ ∆ Q (Std $)] ............. FFFF* Payroll Payable (Act Q)(Act $).......................... xxxx RECORD VARIABLE OVERHEAD AND ISOLATE VARIANCES (three steps): 1. Record VOH Incurred: VOH Control (Act Q)(Act $)................................. xxxx Accounts payable and other credits...................... xxxx 2. Record VOH Applied to WIP: WIP (Std Q for units produced)(Std $)...................... xxxx VOH Applied............................................. xxxx 3. Isolate VOH Variances for the period: VOH Applied (Std Q for units produced)(Std $).............. xxxx VOH $ Variance (U) [ ∆ $ (Act Q)] ....................... UUUU* VOH Efficiency Variance (U) [ ∆ Q (Std $)] .............. UUUU* VOH $ Variance (F) [ ∆ $ (Act Q)] .................... FFFF* VOH Efficiency Variance (U) [ ∆ Q (Std $)] ............ FFFF* VOH Control (actual amounts)............................ xxxx Record Fixed Factory Overhead and Isolate Variances: (two steps) 1. Record Actual FOH: Fixed OverHead (FOH) Control (Actual amounts incurred) xxxx Various Accounts (at actual billed amounts)............. xxxxDr. M. D. Chase Long Beach State University Acct 310 70-A Flexible Budgets and Standard Costing Page 3 2. Isolate FOH Variances: FOH Applied (application rate)(level of activity).......... xxxx FOH Budget Variance (Actual Cost - Flex-budget cost) (U) UUUU* FOH Volume
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