Flexible Budgets and Standard Cost Systems

Marsh Company uses a standard cost system and reports the following information for 2018: 

Standards: 

3 yards of cloth per unit at \(1.05 per yard 

2 direct labor hours per unit at \)10.50 per hour 

Overhead allocated at \(5.00 per direct labor hour 

Actual: 

2,600 yards of cloth were purchased at \)1.10 per yard 

Employees worked 1,800 hours and were paid \(10.00 per hour 

Actual variable overhead was \)1,700 

Actual fixed overhead was \(7,300

Direct materials cost variance \) 130 U 

Direct materials efficiency variance 420 F 

Direct labor cost variance 900 F 

Direct labor efficiency variance 2,100 F 

Variable overhead cost variance 1,500 U 

Variable overhead efficiency variance 1,500 F 

Fixed overhead cost variance 600 U 

Fixed overhead volume variance 1,600 F 

Marsh produced 1,000 units of finished product in 2018. Record the journal entries to record direct materials, direct labor, variable overhead, and fixed overhead, assuming all expenditures were on account and there were no beginning or ending balances in the inventory accounts (all materials purchased were used in production, and all goods produced were sold). Record the journal entries to record the transfer to Finished Goods Inventory and Cost of Goods Sold (omit the journal entry for Sales Revenue). Adjust the Manufacturing Overhead account

McCarthy Fender, which uses a standard cost system, manufactured 20,000 boat fenders during 2018. The 2018 revenue and cost information for McCarthy follows: 

Sales Revenue \( 1,300,000 

Cost of Goods Sold (at standard) 196,800 

Direct materials cost variance 7,150 F 

Direct materials efficiency variance 5,950 U 

Direct labor cost variance 400 U 

Direct labor efficiency variance 530 F 

Variable overhead cost variance 650 U 

Variable overhead efficiency variance 360 F 

Fixed overhead cost variance 2,350 U 

Fixed overhead volume variance 4,410 U 

Assume each fender produced was sold for the standard price of \)65, and total selling and administrative costs were $250,000. Prepare a standard cost income statement for 2018 for McCarthy Fender

Cell One Technologies manufactures capacitors for cellular base stations and other communications applications. The company’s July 2018 flexible budget shows output levels of 6,000, 7,500, and 9,500 units. The static budget was based on expected sales of 7,500 units.

The company sold 9,500 units during July, and its actual operating income was as follows:

Requirements

1. Prepare a flexible budget performance report for July.

2. What was the effect on Cell One’s operating income of selling 2,000 units more than the static budget level of sales?

3. What is Cell One’s static budget variance for operating income?

4. Explain why the flexible budget performance report provides more useful information to Cell One’s managers than the simple static budget variance. What insights can Cell One’s managers draw from this performance report?

Preparing a flexible budget computing standard cost variance

Morton Recliners manufactures leather recliners and uses flexible budgeting and a

standard cost system. Morton allocates overhead based on yards of direct materials.

The company’s performance report includes the following selected data:

Requirements

1. Prepare a flexible budget based on the actual number of recliners sold.

2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost,variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar.

3. Have Morton’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why?

4. Describe how Morton’s managers can benefit from the standard cost system.

Computing standard cost variances and reporting to management

Hear Smart manufactures headphone cases. During September 2018, the company produced and sold 105,000 cases and recorded the following cost data:

Standard Cost Information

Actual Cost Information

Requirements

1. Compute the cost and efficiency variances for direct materials and labor.

2. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.

3. Hear Smart’s management used better quality materials during September. Discuss the tradeoff between the two direct material variances.

Computing and journalizing standard cost variances

Moss manufactures coffee mugs that it sells to other companies for customizing with their own logos. Moss prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:

Actual cost and production information for July 2018 follows: 

a. There were no beginning or ending inventory balances. All expenditures were on account.

b. Actual production and sales were 62,500 coffee mugs. 

c. Actual direct materials usage was 11,000 lbs. at an actual cost of \)0.17 per lb. 

d. Actual direct labor usage was 197,000 minutes at a total cost of \(25,610. 

e. Actual overhead cost was \)10,835 variable and \(29,765 fixed. 

f. Selling and administrative costs were \)95,000.

Requirements 

1. Compute the cost and efficiency variances for direct materials and direct labor. 

2. Journalize the purchase and usage of direct materials and the assignment of direct labor, including the related variances. 

3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances. 

4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize the movement of all production costs from Work­-in­-Process Inventory. Journalize the adjusting of the Manufacturing Overhead account. 

5. Moss intentionally hired more highly skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?

Review your results from Problem P23-­28A. Moss’s standard and actual sales price per mug is $3. Prepare the standard cost income statement for July 2018.

Preparing a flexible budget performance report

Cell Plus Technologies manufactures capacitors for cellular base stations and other communication applications. The company’s July 2018 flexible budget shows output levels of 8,500, 10,000, and 12,000 units. The static budget was based on expected sales of 10,000 units.

The company sold 12,000 units during July, and its actual operating income was as follows:

Requirements 

1. Prepare a flexible budget performance report for July 2018. 

2. What was the effect on Cell Plus’s operating income of selling 2,000 units more than the static budget level of sales? 

3. What is Cell Plus’s static budget variance for operating income? 

4. Explain why the flexible budget performance report provides more useful information to Cell Plus’s managers than the simple static budget variance. What insights can Cell Plus’s managers draw from this performance report?

Preparing a flexible budget and computing standard cost variances

McKnight Recliners manufactures leather recliners and uses flexible budgeting and a standard cost system. McKnight allocates overhead based on yards of direct materials. The company’s performance report includes the following selected data:

Requirements 

1. Prepare a flexible budget based on the actual number of recliners sold. 

2. Compute the cost variance and the efficiency variance for direct materials and for direct labor. For manufacturing overhead, compute the variable overhead cost, variable overhead efficiency, fixed overhead cost, and fixed overhead volume variances. Round to the nearest dollar. 

3. Have McKnight’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why? 

4. Describe how McKnight’s managers can benefit from the standard cost system.

Preparing a flexible budget and performance report 

This continues the Piedmont Computer Company situation from Chapter 22. Assume Piedmont Computer Company has created a standard cost card for the PCC model tablet computer, with overhead allocated based on direct labor hours:

During the month of September, Piedmont Computer Company incurred the following costs while manufacturing 1,100 PCC model tablets:

Requirements 

1. Prepare a flexible budget for September for 900, 1,000, and 1,100 PCC model tablets. The tablet has a standard sales price of \)675. List variable costs separately. 

2. Using 1,000 PCC model tablets for the static budget, prepare a flexible budget performance report for September. Total sales revenue for the month was $767,800. The company sold 1,100 tablets. 

3. What insights can the management of Piedmont Computer Company draw from the performance report?

Question: Garland Company expects to sell 600 wreaths in December 2018, but wants to plan for 100 more and 100 less than expected. The wreaths sell for \(5.00 each and have variable costs of \)2.00 each. Fixed costs are expected to be $500 for the month. Prepare a flexible budget for 500, 600, and 700 wreaths.

Question: Match the variance to the correct definition. 

Variance Definition 

2. Cost variance 

3. Efficiency variance 

4. Flexible budget variance 

5. Sales volume variance 

6. Static budget variance 

a. The difference between the expected results in the flexible budget for the actual units sold and the static budget. 

b. The difference between actual results and the expected results in the flexible budget for the actual units sold. 

c. Measures how well the business keeps unit costs of material and labor inputs within standards. 

d. The difference between actual results and the expected results in the static budget. 

e. Measures how well the business uses its materials or human resources

Question: Tipton Company manufactures shirts. During June, Tipton made 1,200 shirts and gathered the following additional data: 

Direct materials cost standard \(6.00 per yard of fabric 

Direct materials efficiency standard 1.50 yards per shirt 

Actual amount of fabric purchased and used 1,680 yards 

Actual cost of fabric purchased and used \)10,500 

Direct labor cost standard \(15.00 per DLHr 

Direct labor efficiency standard 2.00 DLHr per shirt 

Actual amount of direct labor hours 2,520 DLHr 

Actual cost of direct labor \)36,540 

Calculate the following variances: 

7. Direct materials cost variance 

8. Direct materials efficiency variance 

9. Total direct materials variance 

10. Direct labor cost variance 

11. Direct labor efficiency variance 

12. Total direct labor variance

Question: This Try It! continues the previous Try It! for Tipton Company, a shirt manufacturer. During June, Tipton made 1,200 shirts but had budgeted production at 1,400 shirts. Tipton gathered the following additional data: 

Variable overhead cost standard \(0.50 per DLHr 

Direct labor efficiency standard 2.00 DLHr per shirt 

Actual amount of direct labor hours 2,520 DLHr 

Actual cost of variable overhead \)1,512 

Fixed overhead cost standard \(0.25 per DLHr 

Budgeted fixed overhead \)700 

Actual cost of fixed overhead $750 

Calculate the following variances: 

13. Variable overhead cost variance 

14. Variable overhead efficiency variance 

15. Total variable overhead variance 

16. Fixed overhead cost variance 

17. Fixed overhead volume variance 

18. Total fixed overhead variance

Question: Match the product cost variance with the manager most probably responsible. Some answers may be used more than once. Some answers may not be used. 

Variance Manager 

19. Variable overhead cost variance 

20. Direct materials efficiency variance 

21. Direct labor cost variance 

22. Fixed overhead cost variance 

23. Direct materials cost variance 

a. Human resources 

b. Purchasing 

c. Production

Gunter Company reported the following manufacturing overhead variances.

24. Record the journal entry to adjust Manufacturing Overhead. 

25. Was Manufacturing Overhead overallocated or underallocated?

Matching terms

Match each term to the correct definition.

Terms Definitions

a. Flexible budget

b. Flexible budget variance

c. Sales volume variance

d. Static budget

e. Variance

1. A summarized budget for several levels of volume thatseparates variable costs from fixed costs.

2. A budget prepared for only one level of sales.

3. The difference between an actual amount and thebudgeted amount.

4. The difference arising because the company actuallyearned more or less revenue, or incurred more or lesscost, than expected for the actual level of output.

5. The difference arising only because the number ofunits actually sold differs from the static budget units.

What is a variance?

Explain the difference between a favorable and an unfavorable variance.

Question: What is a static budget performance report?

Question: How do flexible budgets differ from static budgets?

Question: How is a flexible budget used?

Question: What are the two components of the static budget variance? How are they calculated?

Question: What is a flexible budget performance report?

Question: What is a standard cost system?

Question: Explain the difference between a cost standard and an efficiency standard. Give an example of each.

Question: Give the general formulas for determining cost and efficiency variances.

Question: How does the static budget affect the cost and efficiency variances?

Question: List the direct materials variances, and briefly describe each. 

Question: List the direct labor variances, and briefly describe each.

Question: List the variable overhead variances, and briefly describe each

Question: List the fixed overhead variances, and briefly describe each.

Question: How is the fixed overhead volume variance different from the other variances?

Question: What is management by exception?

List the eight product variances and the manager most likely responsible for each.

Briefly describe how journal entries differ in a standard cost system.

Question: What is a standard cost income statement?

00Question: Mason Fender is a competitor of Matthews Fender from Exercise E23­19. Mason Fender also uses a standard cost system and provides the following information: 

Static budget variable overhead \( 2,300 

Static budget fixed overhead \) 23,000 

Static budget direct labor hours 575 hours 

Static budget number of units 23,000 units 

Standard direct labor hours 0.025 hours per fender 

Mason Fender allocates manufacturing overhead to production based on standard direct labor hours. Mason Fender reported the following actual results for 2018: actual number of fenders produced, 20,000; actual variable overhead, \(5,350; actual fixed overhead, \)26,000; actual direct labor hours, 460. 

Requirements 

1. Compute the overhead variances for the year: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance. 

2. Explain why the variances are favorable or unfavorable.

Preparing flexible budgets

Moje, Inc. manufactures travel locks. The budgeted selling price is \(19 per lock, thevariable cost is \)9 per lock, and budgeted fixed costs are $13,000 per month. Prepare aflexible budget for output levels of 4,000 locks and 11,000 locks for the month endedApril 30, 2018.

Calculating flexible budget variances

Complete the flexible budget variance analysis by filling in the blanks in the partialflexible budget performance report for 9,000 travel locks for Grant, Inc.

Matching terms

Match each term to the correct definition.

Terms Definitions

a. Benchmarking

b. Efficiency variance

c. Cost variance

d. Standard

1. Measures whether the quantity of materials or laborused to make the actual number of outputs is within thestandard allowed for the number of outputs.

2. Uses standards based on best practice.

3. Measures how well the business keeps unit costs ofmaterials and labor inputs within standards.

4. A price, cost, or quantity that is expected under normalconditions.

Identifying the benefits of standard costs

Setting standards for a product may involve many employees of the company. Identify some of the employees who may be involved in setting the standard costs, and describe what their role might be in setting those standards.

Martin, Inc. is a manufacturer of lead crystal glasses. The standard direct materialsquantity is 1.0 pound per glass at a cost of \(0.50 per pound. The actual result for onemonth’s production of 6,500 glasses was 1.2 pounds per glass, at a cost of \)0.30 perpound. Calculate the direct materials cost variance and the direct materials efficiencyvariance.

Martin, Inc. manufactures lead crystal glasses. The standard direct labor time is 0.5 hours per glass, at a cost of \(18 per hour. The actual results for one month’s production of 6,500 glasses were 0.2 hours per glass, at a cost of \)11 per hour. Calculate the direct labor cost variance and the direct labor efficiency variance.

Interpreting material and labor variances

Refer to your results from Short Exercises S23­6 and S23­7.

Requirements

1. For each variance, who in Martin’s organization is most likely responsible?

2. Interpret the direct materials and direct labor variances for Martin’s management.

Computing standard overhead allocation rates

The following information relates to Morgan, Inc.’s overhead costs for the month:

Morgan allocates manufacturing overhead to production based on standard direct labor hours. Compute the standard variable overhead allocation rate and the standard fixed overhead allocation rate.

Computing overhead variances

Refer to the Morgan, Inc. data in Short Exercise S23­9. Last month, Morgan reported the following actual results: actual variable overhead, \(10,800; actual fixed overhead, \)2,770; actual production of 7,000 units at 0.20 direct labor hours per unit. The standard direct labor time is 0.25 direct labor hours per unit (1,300 static direct labor hours / 5,200 static units).

Requirements 

1. Compute the overhead variances for the month: variable overhead cost variance, variable overhead efficiency variance, fixed overhead cost variance, and fixed overhead volume variance. 

2. Explain why the variances are favorable or unfavorable.

Understanding variance relationships

Complete the table below for the missing variances.

Journalizing materials entries

The following direct materials variance analysis was performed for Moore.

Requirements 

1. Record Moore’s direct materials journal entries. Assume purchases were made on the account.

2. Explain what management will do with this variance information        

The following direct labor variance analysis was performed for Morris.

AC × AQ \(19,800 SC × SQ \)14.00 per DLHr × 1,350 DLHr \(18,900 SC × AQ \)14.00 per DLHr × 1,800 DLHr \(11.00 per DLHr × 1,800 DLHr \)25,200 Efficiency Variance Cost Variance \(5,400 F \)6,300 U

Requirements 

1. Record Morris’s direct labor journal entry (use Wages Payable). 

2. Explain what management will do with this variance information.