Budgeting and Standard Cost Systems Chapter 13 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objectives After studying this chapter, you should be able to: • Describe budgeting, its objectives, its impact on human behavior, and types of budget systems • Describe the master budget for a manufacturing company • Describe the types of standards and how they are established • Describe and illustrate how standards are used in budgeting • Compute and interpret direct materials and direct labor variances • Describe and provide examples of nonfinancial performance measures ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe budgeting, its objectives, its impact on human behavior, and types of budget systems ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Budgeting • A budget is a _ for a business • Objectives of budgeting: • _ • _ • _ ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Managerial Functions Affected by Budgets Exhibit 1: _ ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Human Behavior and Budgeting • Importance of setting a reasonable budget: • Budgets set too tightly _ employees when expectations are too high • Budgets set too loosely lead to budgetary slack – called “padding” the budget Employees may develop a “spend it or lose it” mentality • occurs when the employees’ or managers’ self-interest differs from the company’s objectives or goals ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Continuous Budgeting Systems • Continuous budgets maintain a _ into the future Exhibit 3: Continuous Budgeting ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Developing Budget Estimates • budgeting requires managers to estimate sales, production, and other data as though operations are being started for the first time • More common methods involve revising last year’s budget: • • ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Static and Flexible Budgets • Static Budget: It is based on _ activity level and does not change if circumstances change Exhibit 4: Static Budget Exhibit 5: Flexible Budget • Flexible Budget: It shows expected results at activity levels ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Static and Flexible Budgets Flexible budgeting adjustments produce lower actualto-budget differences Exhibit 6: Static and Flexible Budgets No of units Produced ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Using Standards • We’ll illustrate the use of standards in budgeting by examining Cowpoke Inc., a manufacturer of blue jeans The standard cost of size XL jeans is below Exhibit 20: Standards Cost for XL Jeans ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Budget Performance Report • Assume the actual jeans sold were 5,000 pairs compared to the original budget of 6,000 pairs Exhibit 21: Budget Performance Report ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Budget Performance Report • Variance: • Actual Cost < Standard Cost = • Actual Cost > Standard Cost = Exhibit 21: Budget Performance Report ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Compute and interpret direct materials and direct labor variances ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Summary of Manufacturing Cost Variances Exhibit 22: Manufacturing Cost Variances ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Direct Materials Variances • Direct Materials Price Variance • Difference between the and the multiplied by the • Direct Materials Quantity Variance • Difference between the and the _(based on the actual production level) multiplied by the ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Direct Materials Variances for Cowpoke Inc Standard Price = $5 per yard Standard Quantity = 7,500 yards (5,000 pairs * 1.5 yards/pair of jeans) Actual Price = $5.50 per yard Actual Quantity = 7,300 yards Standard Cost Actual Cost 7,300 yards × $5 per yard = $36,500 7,300 yards × $5.50 per yard = $40,150 $3,650 Unfavorable Direct Materials 7,500 yards × $5 Quantity Variance per yard = $37,500 7,300 yards × $5 per yard = $36,500 $1,000 Favorable Direct Materials Price Variance Variance Total Direct Materials Cost Variance = $2,650 Unfavorable ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Direct Materials Variances for Cowpoke Inc Exhibit 23: Direct Materials Variance Relationships ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Direct Labor Variances • Direct Labor Rate Variance • Difference between the _and _ multiplied by the _ • Direct Labor Time Variance • Difference between the _ and the _(based on the actual production level) multiplied by the _ ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Direct Labor Variances for Cowpoke Inc Standard Rate = $9 per hour Standard Hours = 4,000 hours (5,000 pairs at 80 hours per pair) Standard Actual Price = $10 per hour Actual Hours = 3,850 Actual Variance Direct Labor Rate Variance 3,850 hours × $9 per hour = $34,650 3,850 hours × $10 per hour = $38,500 $3,850 Unfavorable Direct Labor Time Variance 4,000 hours × $9 per hour = $36,000 3,850 hours × $9 per hour = $34,650 $1,350 Favorable Total Direct Labor Cost Variance = $2,500 Unfavorable ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Direct Labor Variances for Cowpoke Inc Exhibit 24: Direct Labor Variance Relationships ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe and provide examples of nonfinancial performance measures ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Nonfinancial Performance Measures ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Nonfinancial Performance Measures • Nonfinancial performance measures should be used in conjunction with financial measures to avoid • Common examples: ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part End of Chapter 13 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part ... Master Budget • A master budget is a series of budgets that are _ together • Major parts of a master budget include: ©2 013 Cengage Learning All Rights Reserved... cost budget • Desired ending inventory • Estimated beginning inventory Exhibit 13: Cost of Goods Sold Budget ©2 013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated,... Combines the following: • Schedule of cash collections – projects cash inflows from sales • Schedule of cash payments – projects cash outflows for manufacturing costs ©2 013 Cengage Learning All Rights