Budgeting Basics Standard Manufacturing Costs Manufacturing Cost Variances Chapter 13 A200 Survey of Accounting University of Tennessee Fall 2015 2 Ch 13 Budgeting Basics Budget Financial plan written in advance of an operating period planning projecting for the future The Master Budget Budgeted income statement projected Revenue projected Expenses projected Net Income Budgeted balance sheet projected Assets projected Liabilities projected Equity Continuous Budgeting Budgets are projected for 12 months into the future As each month concludes another future month is added 3 Ch 13 Budgeting Basics Budgeting Objectives Planning before year begins Controlling end of year Observe deviations from the budget Write the budget Execute the budget Directing during year 4 Ch 13 Budget Basics Incremental Budgeting vs Zero Based Budgeting Incremental Budgeting Managers base budgets on revenue and expense levels of past periods with projected increases for the future period Fosters budgetary slack Managers tend to build low revenue growth and high expenses into incremental budgets so that they will always have favorable variances Fosters overspending An attitude of spend it or lose it for budgeted expenditures a drop in expenditures in one period will affect future periods Zero Based Budgeting Managers base budgets on new figures each period Static Projected revenue and expenses for only one level of activity Flexible Projected revenue and expenses for several possible activity levels 5 Ch 13 Standard Manufacturing Costs budgeted planned amounts for manufacturing costs Standard Price amount the company planned to pay for the elements of production DM DL and FOH Standard Quantity quantity of DM DL and FOH the company planned to use in making the product Standard Cost total planned cost of the product standard cost standard price x standard quantity Theoretical or Ideal standards set too tight Currently Attainable or Normal standards set realistically 6 Ch 13 Actual Manufacturing Costs Actual Price amount the company actually paid for the elements of production DM DL and FOH Actual Quantity quantity of DM DL and FOH the company actually used in making the product Actual Cost total actual cost of the product actual cost actual price x actual quantity At the end of the period compare actual to standard the Controlling objective of budgeting 7 Ch 13 Manufacturing Cost Variances Woodline s standard budgeted manufacturing costs DM cost DL cost FOH cost Total cost Standard Price Rate x Standard Quantity Time 15 10 lb 25 00 hr 10 00 hr 12 000 lbs 8 416 hrs 6 500 hrs Standard Cost 181 200 210 400 65 000 456 600 Woodline s actual manufacturing costs from Ch 10 slide 15 DM cost DL cost FOH cost Total cost Actual Price Rate x Actual Quantity Time 12 80 lb 12 500 lbs 24 00 hr 9 000 hrs 10 00 hr 6 500 hrs Actual Cost 160 000 216 000 65 000 441 000 8 Ch 13 Manufacturing Cost Variances WoodLine reports the differences between actual costs and standard costs in a Budget Performance Report to report on performance and improve budgeting for the next period WoodLine Co Budget Performance Report for March 2015 Actual Cost Standard Cost Cost Variance Direct materials 160 000 181 200 21 200 Favorable Direct labor 216 000 210 400 5 600 Unfavorable Factory Overhead 65 000 65 000 0 Totals 441 000 456 600 15 600 Favorable WoodLine then breaks down each cost variance further into price variance and quantity variance 9 Ch 13 Direct Materials Cost Variances DM Price Variance report to the manager of the Purchasing Dept AQ AP SP 12 500 lbs x 12 80 lb 15 10 lb 28 750 Favorable DM Quantity Variance report to the managers of the Production Dept and the Purchasing Dept SP AQ SQ 15 10 lb x 12 500 lbs 12 000 lbs 7 550 Unfavorable DM Price Variance 28 750 Favorable DM Quantity Variance 7 550 Unfavorable Total DM Cost Variance 21 200 Favorable 10 Ch 13 Direct Labor Cost Variances DL Rate Variance report to the manager of the Production Dept AT AR SR 9 000 hrs 24 00 hr 25 00 hr 9 000 Favorable DL Time Variance report to the manager of the Production Dept SR AT ST 25 00 hr 9 000 hrs 8 416 hrs 14 600 Unfavorable DL Rate Variance DL Time Variance Total DL Cost Variance 9 000 Favorable 14 600 Unfavorable 5 600 Unfavorable