PART C: BUDGETING

forecasting -> planning -> budgeting

variance
actual cost > budgeted cost -> adverse
actual revenue > budgeted revenue -> favourable

objectives
|
targets
|
budgets

A budget is a financial and/or quantified plan of operation for a forthcoming accounting period

A budget is a plan of what the organisation is aiming to achieve

Forecast is an estimate of what is likely to occur in the future

The objectives of a budgetary planning and control system

- to ensure the achievement of the organisation's objectives
- to compel planning
- to communicate ideas and plans
- to co-ordinate activities
- to provide a framework for responsibility accounting
- to establish a system of control
- to motivate employees to improve their performance

Functional budget:
 Sales budgets
Production budget
Raw material usage budget
Raw material purchase budget
Labour budget
Overhead budget

Master budget:
Budgeted income statement
Budgeted statement of financial position
Cash budget

(a) Sales budget

X Y Z
Sales quantity 2,000 4,000 3,000
Sales price $100 $130 $150
Sales value $200,000 $520,000 $450,000

(b) Production budget

X Y Z
Sales quantity 2,000 4,000 3,000
Closing inventory 600 1000 800
2600 5000 3800
Opening inventory 500 800 700
Budgeted peoduction 2100 4200 3100

(c) Raw material usage bidget

Production RM11 RM22 RM33
Product X 2100 10500 4200 0
Product Y 4200 12600 8400 8400
Product Z 3100 6200 3100 9300
(e) Labour budget 29300 15700 17700
Production Hrs needed/unit Total hrs Rate per hrs Cost
Product X 2100 4 8400 $9 $75600 (d) Raw material purchase budget
Product Y 4200 6 25200 $226800 RM11 RM22 RM33
Product Z 3100 8 24800 $223200 Budgeted material usage 29300 15700 17700
$525600 Closing inventory 18000 9000 12000
Opening inventory 21000 10000 16000
Budgeted material purchase 26300 14700 13700

Standard cost per unit $5 $3 $4

Budgeted material purchase $131500 $44100 $54800

Fixed budget, flexible budget and budgetary control:

* Fixed budget:
The master budget prepared before beginning of the budget period is known as the fixed budget
- The budget is prepared on the basis of an estimated volume of production and an estimated volume of sales
e.g.
Production and sales 1.000 units
$
Direct materials 4.000 --> material standard cost = $4/unit
Direct labour 3.000 --> labour standard cost = $3/unit

- The major purpose of a fixed budget is at the planning stage, when it seeks to define the broad objectives of the organisation

--> A fixed budget is a budget which is designed to remain unchanged regardless of the volume of output or sales achieved

* Flexible budget:
is a budget which by recognising different cost behaviour pattern, is designed to change as volume of output change
e.g.
Production and sales 800 units 1200 units
$
Direct materials 3.200 4800
Direct labour 2.400 3600

* Budgetary control:

* Favourable: actual cost < budgeted cost

actual revenue > budgeted revenue

* Adverse: actual cost > budgeted cost

actual revenue < budgeted revenue
 --> preparing flexible budget based on marginal costing principles
--> identify fixed and variable costs
Flexible budget:
3000 unti
Direct material costs = $6000/2000=$3/unit 9000
Direct labour = $4000/2000=$2/unit 6000
Maintainance = $1000/2000=$0.5/unit 1500
Dep= $2000 2000
Rent and rates = $1500 1500
Other=$1600=semi 4600

Variances are difference arising between the budget and actual results:
Difference between fixed budget and actual result = Total variance
Difference between fixed budget and flexible budget = Volume variance
Difference between flexible budget and actual result = Expenditure variance

PART D: STANDARD COSTING

Standard cost is a predetermined estimated unit cost, used for inventory valuation and control

The uses of standard costing:

2 principal uses,
- To value inventories and production cost for cost accounting purpose
- As a control device by establishing standards (planned costs), highlighting (via variance analysis)

e.g Direct material costs $3/unit -> standard cost per unit
Material X - 3kg/unit -> standard usage
Price - $1/kg -> standard price

Variance analysis:
A variance of the difference between a planned, budgeted or standard costs and the actual cost incurred

Variance canbe divided into 3 main groups:

Variable cost variances: Direct material
 Direct labour
Variance production OH
Fixed production OH variance
Sale variance

* Cost variances:
Direct material cost variances
- The direct material total variance is the difference between what the output actually cost and what it should have cost
- The direct material price variance is the difference between the actual cost andd the standard cost for the actual quantity of material used
- The direct material usage variance is the difference between the standard quantity of materials that
should have been used for actual production, and the actual quantity of material used, value at standard cost
per unit of material

=> Material price variance = (Standard price - Actual production)* Actual quantity
=> Material usage variance = (SQ - AQ)* SP

Standard material usage = 10kg/unit Actual production = 1000 units

Standard material price = $10/kg Actual material usage = 11700kg
--> Standard material cost = $100/unit Actual material cost = $98600

(a) Total variance:

Actual production 1000units
Actual cost = $98600
Should have cost = 1000 * $100 = $100.000
Direct material variance = $100.000 - $98.000 = $1.400 F

(b) Price variance:

(c1) => Material price variance = (Standard price - Actual production)* Actual quantity
= ($10 - (AP=98.600/11.700))* 11.700 = $117.000 - $98.000 = $18.400

(c2) At actual output of 1.000 unit

Actual cost : $98.600
11.700kg should have cost 11.700kg*$10/kg $117.000
Direct material price variance $18.400 F

(c) Usage variance:

(c1) At actual poutput of 1000units
 Should have used 1.000 *10kg 10.000kg
Actual usage 11.700kg
Usage variance (kg) 1.700kg A
Valued at standard price $10
Usage variance ($) $17.000 A

(c2) => Material usage variance = (SQ - AQ)* SP

=> (SQ - AQ)* SP =(1000*10-11700)*$10

Direct labour cost variances

- Direct labour total variance Between actual labour cost and standard labour cost at actual output (difference between what the output should have cost and what it did cost,
- Direct labour rate variance (Standard rate - actual rate) * actual hour
- Direct labour efficiency variance (SH - AH) * SR

Standard hour = 2hrs/unit Actual production = 1000 units

Standard labour rate = $5/hrs Actual material usage = 2300hrs
--> Standard labour cost = $10/unit Actual material cost = $8.900

(a) Total variance

At actual production of 1000 units
Actual labour cost $8.900
Should have cost 1000units*$10 $10.000
Total variance $1.100 F

(b) Labour rate variance

To produce the actual output of 1000units
--> actual hrs=2300hrs
Actual cost $8.900
Should have cost 2300hrs*$5 $11.500
Labour rate variance $2.600 F

(c) Labour efficiency variance

To produce the actual output of 1000units (AH-SH)*SR
--> actual hrs=2300hrs 2300hrs (2300-1000*2)*$5
 Should have taken 1000units*2hrs 2000hrs
Labour efficiency variance (in hrs) 300hrs A
Valued at standard labour rate $5
Labour efficiency variance (in $) $1500 A

Variable production OH variances

- Variance production OH total variance
- Variance production OH expenditure variance
- Variance production OH efficiency variance

--> It is usually assumed that variable OH are incurred active working hrs, but are not incurred during idle time
--> actual hrs = 2020-60=1960hrs

Total variance= $75 (A)

Expenditure = 135$ (Adverse)
Efficiency = $60 (Favourable)

* Fixed production OH variances:

- Absoption costing: - Marginal costing:
+ Expenditure variance + Expenditure variance
+ Volume variance:
#Volume efficiency
# Volume capacity

OAR = Budgeted fied OH/ Budgeted activity level Absorbed OH = Std OAR per unit * actual output

Fixed OH total variance is the difference between actual fixed OH and absorbed fixed OH --> under- or over-absorbed fixed OH
Fixed OH expenditure variance is the difference between actual fixed OH expenditure and budgeted fixed OH expenditure --> under- or over-absorbed fixed OH
Fixed OH volume variance is the difference between actual and budgeted output, multiplied by the standard absorption rate per unit (standard OAR per unit)
Fixed OH volume efficiency variance is the difference between of hrs that should have taken for actual
production, and the number of hrs actually taken, multiple by the standard absorption rate per hrs

Fixed OH volume capacity variance is the difference between of total budgeted hrs and the total actual hrs
worked, multiple by the standard rate per hrs
Budgeted output 1.000units Actual fixed OH $20.450
Standard hrs 5hrs/unit Actual output 1.100 units
Budgeted fixed OH $20.000 Actual hrs 5.400hrs
Budgeted OAR per hrs $4/hrs
Budgeted OAR per unit $20/unit

(a) Total variance

Actual fixed OH $20.450
Absorbed fixex OH = Budgeted OAR per unit * Actual output =$20*1100units= $22.000
Total variance $1.550 (F) (over-arbsorbed)

(b) Expenditure variance

Actual fixed OH $20.450
Budgeted fixed OH $20.000
$450 (A)
(c) Volume variance
Actual output at std rate (1100*$20) $22000
Budgeted output at std rate (100*$20) $20000
$2000 (F)

(d) Volume efficiency

to produce the actual output of 1100units
actual hrs 5400hrs
should take (1100units*5hrs) 5500hrs
100hrs (F)
Std OAR per hrs $4
$400(F)

(e) Volume capacity

Budgeted hrs of worked (1000units*5hrs) 5000hrs
Actual hrs worked 5400hrs
400hrs (F)
Std OAR per hrs $4
$1600(F)
* Sales variances:
Selling price variance is a measure of the effect on expected profit of a different price to std selling price
(AP-SP)*AQ

If applying absorption costing

Sales volume profit variance is the difference between the actual units sold and the budgeted quantity, valued at the std profit per unit
(AQ-SQ)* std profit per unit

If applying marginal costing

Sales volume contribution variance is the difference between the actual units sold and the budgeted quantity, valued at the std contribution per unit
(AQ-SQ)*std contribution per unit

Selling price variance = (AP-SP)*AQ

=($29-$30)*620=$620 A

Sales volume profit variance = (AQ-SQ)*std profit per unit

= (620-600)*($30-$28)=$40 F

* Operating statement: (Absorption costing)

$ $
Budgeted profit (SQ*SP per unit) X
Sales volume profit variance (AQ-SQ)*std profit per unit X
Std profit from actual sales (AQ*SP per unit) X
(F) (A)
Variances $ $
Sales price
Material price
Material usage
Labour rate
Labour efficiency
Variable OH expenditure
Variable OH efficiency
Fixed OH expenditure
Fixed OH volume
X X X
 Actual profit X

* Operating statement: (Marginal costing)

$ $
Budgeted contributions X
Sales volume contribution variance X
Std contribution from actual sales X

(F) (A)
Variances $ $
Sales price
Material price
Material usage
Labour rate
Labour efficiency
Variable OH expenditure
Variable OH efficiency
X X X
Actual contribution X

Budgeted fixed costs X

Fixed costs expenditure variance X
Actual fixed OH X
Actual profit X