Slide 1Ch. 13: Budgeting BasicsCh. 13: Budgeting BasicsCh. 13: Budget BasicsSlide 5Ch. 13: Actual Manufacturing CostsCh. 13: Manufacturing Cost VariancesCh. 13: Manufacturing Cost VariancesCh. 13: Direct Materials Cost VariancesCh. 13: Direct Labor Cost VariancesBudgeting BasicsStandard Manufacturing Costs Manufacturing Cost VariancesChapter 13A200 – Survey of AccountingUniversity of TennesseeFall 2015Ch. 13: Budgeting BasicsBudget: Financial plan written in advance of an operating period, planning (projecting) for the futureThe Master Budget:Budgeted income statement: projected Revenue – projected Expenses = projected Net Income Budgeted balance sheet: projected Assets = projected Liabilities + projected EquityContinuous Budgeting: Budgets are projected for 12 months into the future. As each month concludes, another future month is added.2Ch. 13: Budgeting BasicsBudgeting Objectives: Planning (before year begins) Controlling Directing (end of year) (during year)3Write the budgetExecute the budgetObserve deviations from the budgetCh. 13: Budget BasicsIncremental Budgeting vs. Zero-Based BudgetingIncremental 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 activityFlexible: Projected revenue and expenses for several possible activity levels45Ch. 13: Standard Manufacturing Costsbudgeted (planned) amounts for manufacturing costsStandard 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 realistically6Ch. 13: Actual Manufacturing CostsActual 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)7Ch. 13: Manufacturing Cost VariancesWoodline’s standard (budgeted) manufacturing costs: DM cost DL cost FOH cost Total cost Standard Price (Rate) $15.10/lb. $25.00/hr. $10.00/hr.x Standard Quantity (Time) 12,000 lbs. 8,416 hrs. 6,500 hrs. = Standard Cost $181,200 $210,400 $65,000 $456,600Woodline’s actual manufacturing costs (from Ch. 10 slide #15): DM cost DL cost FOH cost Total cost Actual Price (Rate) $12.80/lb. $24.00/hr. $10.00/hr.x Actual Quantity (Time) 12,500 lbs. 9,000 hrs. 6,500 hrs. = Actual Cost $160,000 $216,000 $65,000 $441,0008Ch. 13: Manufacturing Cost VariancesWoodLine 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 VarianceDirect materials $160,000 $181,200 $(21,200) Favorable Direct labor 216,000 210,400 5,600 UnfavorableFactory Overhead 65,000 65,000 0 Totals: $441,000 $456,600 $(15,600) FavorableWoodLine then breaks down each cost variance further into price variance and quantity variance.9Ch. 13: Direct Materials Cost VariancesDM 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) FavorableDM 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) Favorable10Ch. 13: Direct Labor Cost VariancesDL Rate Variance: (report to the manager of the Production Dept.) AT (AR – SR) = 9,000 hrs.($24.00/hr. - $25.00/hr.) = $(9,000) FavorableDL 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 $ (9,000) Favorable + DL Time Variance 14,600 Unfavorable = Total DL Cost Variance $ 5,600