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7 Flexible Budgets, Variances, and Management Control I
7 Flexible Budgets, Variances, and Management Control I
Chapter 7
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 7-1
Learning Objective 1
Distinguish
a static budget
from a flexible budget.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 7-2
Static and Flexible Budgets
Planned level of
Static Budget Based on output at start of
the budget period
Budgeted revenues
Based on
Flexible Budget and cost based on
actual level of output
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 7-3
Static Budget Example
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 7-7
Static-Budget Variance Example
Step 1:
Determine budgeted selling price, variable
cost per unit, and budgeted fixed cost.
Budgeted selling price is $155,
variable cost is $115 per suit, and
the budgeted fixed cost is $286,000.
Step 2:
Determine the actual quantity of output.
In the year 2004, 10,000 suits were
produced and sold.
Step 3:
Determine the flexible budget for revenues.
$155 × 10,000 = $1,550,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 7 - 12
Steps in Developing
Flexible Budgets
Step 4:
Determine the flexible budget for costs.
Variable costs: 10,000 × $115 = $1,150,000
Fixed costs 286,000
Total costs $1,436,000
Actual results
operating income
Flexible-budget $100,000
variance
$14,000 U Flexible-budget
operating income
$114,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 7 - 16
Flexible-Budget Variance
Actual Budgeted
Amount Amount
Selling price $160 $155
Variable cost 120 115
Contribution margin $ 40 $ 40
Flexible-budget
operating income
Sales-volume $114,000
variance
$120,000 U Static-budget
operating income
$234,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 7 - 21
Sales-Volume Variance
Actual sales unit – Master budgeted sales units
13,000 – 10,000 = 3,000
×
Budgeted contribution margin per unit $40
=
Total sales-volume variance $120,000 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 7 - 22
Budget Variances
Static-budget
Level 1 variance
$134,000 U
Flexible-budget Sales-volume
Level 2 variance variance
$14,000 U $120,000 U
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 7 - 23
Learning Objective 3
Actual quantity
× Standard
= – Standard price
quantity
Actual quantity
× Standard
= – Standard price
quantity
Actual AQ × BP BQ × BP
Cost 42,500 × $16.25 40,000 × $16.25
$677,875 $690,625 $650,000
$12,750 F $40,625 U
$27,875 U
Actual AQ × BP BQ × BP
Cost 21,500 × $13.00 20,000 × $13.00
$277,350 $279,500 $260,000
$2,150 F $ 19,500 U
$17,350 U
Integrate continuous
improvement
into variance analysis.
Static Actual
Budget Amounts
Units produced and sold 18,000 15,660
Batch size 180 174
Number of batches 100 90
Material-handling
labor-hours per batch 5.00 5.20
Static Actual
Budget Amounts
Total labor-hours 500 468
Cost per material-handling
labor-hour $14.00 $14.50
Total material-handling
labor cost $7,000 $6,786
Describe benchmarking
and how it is used
in cost management.