ACCT 2121 Chapter 7 (To Student)(4)

ACCT 2121
Management Accounting
Chapter 7: Flexible-Budget and Direct Cost

Variances
Miss Kuo MENG
Review of Chapter 6
- We learned the definition of (master) budgets, the classification of budgets, why we need to use budgets and how we can make
different kinds of budgets.
- One of the most challenging budgets: the operating budget
l We start with Q (the number of products we plan to sell in the forthcoming period)
l We determine (forecast) the level of revenue, #OGM / COGM, #/$ of DM/DL to be used/purchased, and how much MOH to be allocated
to each product……
l Finally, we have a budgeted COGS
l OI = TR – COGS – Period Costs
- Cash Budget
- Responsibility Accounting
- Other stuff: Budgetary Slack/Stretch Budget
2
Overview of Chapter 7
LO (1): Static Budgets and Static-Budget Variances
LO (2): Flexible Budget and Flexible-Budget Variance
LO (3): Sales-Volume Variances
LO (4): Standard Costing
LO (5): Standard Costing and Direct Cost Variances
LO (6): Journal Entries of Direct Costs using Standard Costing
3
Management accounting
q Plan à Budgeting
q Control
Control
q Compare the actual and planned operations
q Take corrective actions if actual operation is different from plan
Variance = Actual Amount – Budgeted Amount

q Revenue Variance = Actual Revenue – Budgeted Revenue
q Cost Variance = Actual Cost – Budgeted Cost
bring est control functions of management & facilitates management by exception
↳ uses : the
planning &
-
& untivate
-
evaluate performance managers
4
Favorable Variance (F)

q F means actual amount has the effect of increasing operating income relative to the budgeted amount
q For revenue items, Favorable Variance (F) means actual revenues exceed budgeted revenues
q For cost items, Favorable Variance (F) means actual costs are less than budgeted costs
Budgeted Revenue = $18,000

Revenue Variance = 20 000 -
18, 000 = $2 000 F
Actual Revenue = $20,000
,
,
Budgeted Variable MOH = $3,000

Variable MOH Variance = C 800 -
3 000 = $200F
Actual Variable MOH = $2,800
, ,
5
Unfavorable variance (U)

q U means actual amount has the effect of decreasing operating income relative to the budgeted amount
q For revenue items, Unfavorable Variance (U) means actual revenues are less than budgeted revenues
q For cost items, Unfavorable Variance (U) means actual costs are higher than budgeted costs
Budgeted Revenue = $30,000

Revenue Variance = 30 000 -
29 000 = $1 000 U
Actual Revenue = $29,000 , , ,
Budgeted Variable MOH = $5,000

$1
Variable MOH Variance = 6, 000 - 5 000
,
=
,
000 U
Actual Variable MOH = $6,000
6
(master /
A static budget calculates budgeted revenues and budgeted costs based on the budgeted output
q This budget is made at the beginning of a year
Suppose Webb Company makes the following monthly budget at the beginning of a year:
q Only costs are manufacturing costs à No period costs à OI = TR – COGS
q No inventory of DM, WIP, and FG
q COGS = COGM = TMC = DM + DL + MOH
7
Static-Budget
Budgets Actual Static Budget
Variance
Units Sold 12,000 10,000 12, 000 2000 U
Revenues $120 per output $1,250,000 1 440,

,
000 190
,
000 U
Variable Costs
DM $60 per output $621,600 720, 000 98 400F
,
DL $16 per output $198,000 192, 000 6,

000 U
Variable MOH $12 per output $130,500 144 000 ,

13,
500 F
Total Variable Costs $88/unit $950,100 1

,
056 ,
000 105, 900 F
CM 120 -
88 = $32 $299,900 384 ,
000 84 ,
100 U
Fixed MOH $276,000 for 12,000 units $285,000 276 ,

000 9 ,
000 U
Operating Income $14,900 108 ,

000 93, 100U
Fixed MOH = $276,000 for 12,000 units

à When producing 12,000 units, unit Fixed MOH = $276,000/12,000 = $23
8
Exercise: Given the total amount, compute the per unit amount
Budgets Actual Actual per unit output
Units Sold 12,000 10,000
Revenues $120 per output $1,250,000 1 , 250
, 000/10, 000 = $125
Variable Costs
DM $60 per output $621,600 $62 16 .
DL $16 per output $198,000 $19 80.
Variable MOH $12 per output $130,500 $13 .

05
Total Variable Costs $88 per unit $950,100 $ 95 . 01
CM $120 – $88 = $32 $299,900
Fixed MOH $276,000 for 12,000 units $285,000
Operating Income $14,900
The actual cost is not calculated for each individual product. Instead, we obtain the total actual costs
and obtain an “average” cost for each unit of output.
9
A flexible budget calculates budgeted revenues and budgeted costs based on the actual output in the
budget period
q When calculating the budget, replacing the budgeted output quantity by the actual output quantity
q All other numbers are budgeted numbers
The flexible budget is the hypothetical budget

q Assume that the firm Webb had correctly forecast that actual output for of 10,000 jackets (instead of 12,000
jackets)
q The only difference between the static budget and the flexible budget is that the static budget is prepared for the
output of 12,000 jackets, whereas the flexible budget is prepared on the actual output of 10,000 jackets
10
Flexible-Budget Variance = Actual Amount – Flexible-Budget Amount
q This variance is holding output quantity constant (= actual output quantity), and examines how the other factors
affect the difference between actual and budgeted amount
Flexible-Budget Revenue Variance Actual FB
= Actual Revenue – Flexible-Budget Revenue = 5) 50 000 F,

Units sold 10,000 10,000
= Actual Price * Actual Units Sold – Budgeted Price * Actual Units Sold Revenue $1,250,000 $1,200,000
= (Actual Price – Budgeted Price) * Actual Units Sold Price $125$120

= (125 120)
-
X 10
,
000
The Flexible-Budget Revenue Variance is driven by the difference between actual and budgeted
selling price, which is (Actual Price – Budgeted Price).
q Thus, the Flexible-Budget Revenue Variance is also called Selling-Price Variance
11
q Budgeted outputs = 12,000 units per month q Actual outputs = 10,000 units in the month
Flexible-Budget
Budget Actual Flexible-Budget
Variance
Units Sold 12,000 outputs 10,000 10, 000 O
Revenues $120 per output $1,250,000 1 , 200, 000 50, 000 F
Variable Costs
DM $60 per output $621,600 600 ,
000 21, 6004
DL $16 per output $198,000 160 ,

000 38, 000 U
VMOH $12 per output $130,500 120 ,

000 10, 500U
Total Variable
$950,100 880, 000 70 100 U
Costs ,
CM $299,900 320 ,
000 20 100 U
,
Fixed MOH $23 per unit $285,000 276 ,

000 9, 0004
Operating Income 44 ,
000 29, 100 U
Static-Budget Fixed MOH = $276,000 for 12,000 units

à When producing 12,000 units, unit Fixed MOH = $276,000/12,000 = $23
12
Question(1/2):
Which of the following information is needed to prepare a flexible budget?

A) actual units sold
B) actual variable cost
C) actual selling price per unit
D) actual fixed cost
13
Question(2/2):
A flexible budget:
A) is another name for management by exception
B) is developed at the end of the period
C) is based on the budgeted level of output
D) provides favorable operating results
14
LO (3.1): Sales-Volume Variances
Sale-Volume Variance = Flexible-Budget Amount – Static-Budget Amount
q The sales-volume variance is only driven by the difference in the actual and budgeted sales volume
q Sales volume = Quantity of sales
Example:
Sales-Volume Revenue Variance
= Flexible-Budget Revenue – Static-Budget Revenue
= Budgeted Selling Price * Actual Output Quantity – Budgeted Selling Price * Budgeted Output Quantity
= Budgeted Selling Price * (Actual Output Quantity – Budgeted Output Quantity)
15
Sale-Volume Variance = Flexible-Budget Amount – Static-Budget Amount
Budget Static Budget Flexible Budget Sales-Volume Variance

Units Sold 12,000 outputs 12,000 10,000 2, 000 U
Revenues $120 per output $1,440,000 $1,200,000 240, 000 U
Variable Costs
DM $60 per output $720,000 $600,000 120, 000 F
DL $16 per output $192,000 $160,000 320, 000 F
VMOH $12 per output $144,000 $120,000 240, 000 F
Total Variable Costs $1,056,000 $880,000 176 ,

000 F
CM $384,000 $320,000 64
,
000 U
Fixed Costs $23 per unit $276,000 $276,000 O
Operating Income $108,000 $44,000 64, 000 U
16
q Budgeted outputs = 12,000 units per month q Actual outputs = 10,000 units in the month
Budget Static Budget Flexible Budget Sales-Volume Variance

Units Sold 12,000 outputs 12,000 10,000 2,000 U
Revenues $120 per output $1,440,000 1,200,000 $240,000 U
Variable Costs
DM $60 per output $720,000 600,000 $120,000 F
DL $16 per output $192,000 160,000 $320,000 F
VMOH $12 per output $144,000 120,000 $240,000 F
Fixed Costs $23 per unit $276,000 $276,000 0
Operating Income $108,000 $44,000 $64,000 U
If actual sales < budgeted sales

q Sales-Volume Variances for Revenue, CM, and OI are always Unfavorable
q Sales-Volume Variances for costs variances (DM, DL) are always Favorable
q Sale-volume drives the variance
17
LO (3.2): Static-Budget, Flexible-Budget, and Sales-Volume Variance
Static-Bdgt OI Variance
= Actual – Static Budget
= $93,100 U
Flex-Bdgt OI Variance Sales-Volume OI Variance

= Actual – Flex-Bdgt = Flex-Bdgt – Static-Bdgt
= $29,100 U = $64,000 U
Static-Bdgt OI Variance = FB OI Variance + Sales-Volume OI Variance
$93,100 U = $29,100 U + $64,000 U
18
Static-Bdgt OI Variance
= Actual – Static Budget
= $93,100 U
Flex-Bdgt OI Variance Sales-Volume OI Variance

= Actual – Flex-Bdgt = Flex-Bdgt – Static-Bdgt
= $29,100 U = $64,000 U
Flex-Bdgt Var Flex-Bdgt Var Flex-Bdgt Var Flex-Bdgt Var

Flex-Bdgt Var of Revenue
of DM of DL of VMOH of FMOH
= $50,000 F
= $21,600 U = $38,000 U = $10,500 U = $9,000 U
Direct inputs Indirect inputs

This Chapter: Why do we have direct cost Next Chapter: Why do we have
(DM and DL) flexible-budget variances? indirect cost flexible-budget variances?
19
Question(1/1):
The difference between the static budget amounts and the flexible budget amounts is the:
A) flexible budget variance
B) sales-volume variance
C) static budget variance
D) standard cost variance
20
standard determined cost used as
~
cost -
> carefully
benchmark for
LO (4): Standard Costing judging performance
V to exclude past deficiencies w take into a l
A expected to occur in budget period
Webb Company collects the following information for a month with 10,000 outputs:
q DM purchased and used = 22,200 units
q DL hours (DLH) used = 9,000 DL hours
q Total cost paid to acquire DM = $621,600
q Total cost paid to DL = $198,000
For actual costs, we start with the total payment, and calculate an “average” per unit
Actual Budget
Price of DM The cost per unit of DM ($) $28 $30
Price of DL The cost per unit of DL ($) $22 $20
DM per output The units of DM to produce one output (units) 2 22

.
2
DL per output The units of DL to produce one output (units) 0 . 9 0.8
DM cost per output The total DM cost to produce one output ($) $62 16 . $60
DL cost per output The total DL cost to produce one output ($) $19 80 . $16
21
Why do we have DM and DL flexible-budget variances?
Actual Budget
Price of DM $28 $30
Actual DM Cost = 2) x 2 22 X.
10 ,
000 = $621 ,
600
Price of DL $22 $20
$600
Flex-Bdgt Cost of DM = 30 x 20 x 10, 000 000
=
,
DM per output 2.22 2
q Again, only “flex” the output DL per output 0.9 0.8
Output 10,000 12,000
Actual DL Cost = 22 x 0 .
9x 10, 000 = $198 ,
000
Flex-Bdgt Cost of DL = 20 x 0 .
8 x 10 000
,
= $160 ,
000
q Again, only “flex” the output
Reasons:
1. Price per input can be different
2. Quantity per unit output can be different
How can we analyze these two reasons?
22
Actual Budget
Standard Costing System
Price of DM $28 $30
q Record direct costs and indirect costs based on “standards” set by managers
Price of DL $22 $20
q Standard = Budget
Standard input quantity (SQ) DL per output 0.9 0.8
q SQ is the budgeted quantity of input for one unit of output Output 10,000 12,000
q SQ of DM = 2 SQ of DL = 08
.
Standard input price (SP)

q SP is the budgeted price a firm expects to pay for a unit of input
q SP of DM = $30 SP of DL = $20
Standard cost per output (SC)

q Budgeted cost of a unit of output
q SC of DM = $60 SC of DL = $16
23
Actual Budget
Standard Costing System
Price of DM $28 $30
q Record both direct costs and indirect costs that “should have been paid” Price of DL $22 $20
q How much they should have paid? This is based on “standards” (budgets) DM per output 2.22 units 2 units
set my managers DL per output 0.9 DLH 0.8 DLH

Output 10,000 12,000
Question: How much money should have been paid for DM if the actual production is 10,000 units based
on the standard costing?
C X 30
=
$60
q For one unit of output, the manager set a standard for DM cost of ________________________________________ per
output
10 000
q The actual production of _____________________
, outputs
$600, 000
q Thus, the DM should have been paid for the actual production is _________________________________________
22 200 x 28
,
=$621 600
q But the firm actually paid for the DM is ___________________________________________
,
24
LO (5): Standard Costing and Direct Cost Variances
A company further investigate the flexible-budget variances for its direct-cost inputs
Direct Cost Variance = Price Variance + Efficiency Variance
diffe
help managers gain insight into two
aspects of performance
>
-Price Variance
E
q Reflect the difference between an actual input price and a standard (budgeted) input price
q Do firms pay more or less than they “should have paid” to acquire the inputs they need?
q If a firm actually pays more to acquire direct in puts than “they should have paid” à Purchasing price is
too high
Efficiency Variance
q Reflect the difference between actual input quantity and a standard (budgeted) input quantity
q Do firms use more or fewer direct inputs than they “should have used” for the actual output quantity?
q If a firm “actually” uses more direct inputs than “they should have used” for actual production à
Inefficient in production
25
LO (5.1): Standard Costing – Price Variance
Price Variance Formula
= Actual Price of Input * Actual Quantity of Input – Standard Price of Input * Actual Quantity of Input
= (Actual Price of Input – Standard Price of Input) * Actual Quantity of Input
Price Variance of DM = (28 -

30/ X 22 200
,
=
$44 400F
, Actual Budget
Price of DM $28 $30

q Actual Price of DM = $28
Price of DL $22 $20
q Budgeted Price of DM = $30
22, 200
q Actual Quantity of DM = 2
.22 x 10,000 =
DL per output 0.9 0.8
Output 10,000 12,000
Price Variance of DL = ((2 20) x 9

-
,
000 = 18
,
000 U
q Actual Price of DL = 22
q Budgeted Price of DL = 20
q Actual Quantity of DL = 9 ,
000
26
Price Variance of DM
Actual Budget
q Do firms pay more or less than they “should have paid” to acquire the direct inputs? Price of DM $28 $30

1. Actual Quantity of Input (used for actual production)
Output 10,000 12,000
= Actual Input per Output * Actual Output = units
______________________________
22 200
,
2. Actual Input Cost

$ 621,
600
= Actual Price of Input * Actual Quantity of Input = ______________________________
3. Standard Input Cost

= What the cost “should have been paid” for the Actual Input Quantity
$66 600
= Standard Price of Input * Actual Quantity of Input = ______________________________
,
$) 44, 400F
Price Variance = Actual Input Cost – Standard Input Cost = ______________________________
27
Price Variance of DL
Actual Budget
q Do firms pay more or less than they “should have paid” to acquire the direct inputs? Price of DL $22 $20

1. Actual Quantity of Input (used for actual production)
Output 10,000 12,000
= Actual Input per Output * Actual Output = 0 9X 10, 000 = 9000 DCH
______________________________
.
2. Actual Input Cost

22 x 1000
= $198 000
= Actual Price of Input * Actual Quantity of Input = ______________________________
,
3. Standard Input Cost

= What the cost “should be” for the Actual Input Quantity
20 x 9000 =$180 000
= Standard Price of Input * Actual Quantity of Input = ______________________________
,
$18 000 U
Price Variance = ______________________________
,
28
LO (5.2): Standard Costing – Efficiency Variance
Efficiency Variance Formula
= (Actual Quantity of Input – Budgeted Quantity of Input for Actual Output) * Budgeted Input Price
= (Actual Input per Output – Budgeted Input per Output) * Actual Output * Budgeted Input Price
q Actual Quantity of Input = Actual Quantity of Inputs per Output * Actual Quantity of Output
q The total number of inputs actually used for the total outputs
q Actual quantity of touchscreens used for the actual production of 10,000 iPhones is 10,100
q Standard Quantity of Input for Actual Output = Standard Quantity of Input per Output * Actual Output
q This is the flexible-budget quantity of total inputs
q Managers make a budget for the number of inputs per output
q But “flex” the output from budgeted output to actual output
q Budgeted Input Price

q How much the firm plans to pay to acquire one unit of input
29
Efficiency Variance
= (Actual Quantity of Input – Budgeted Quantity of Input for Actual Output) * Budgeted Input Price
(22 200 000) x 30 66 000 U20 Actual Budget

Efficiency Variance of DM = ______________________________
-
=
, , ,
Price of DM $28 $30

q Actual Quantity of DM = ______________________________
2 22 x 10 000 22 200 =
.
, ,
Price of DL $22 $20

q Standard Quantity of DM for Actual Output = ______________________________
20 000
,

$30
q Budgeted DM Price = ______________________________
Output 10,000 12,000
19 000 8 000) x 20
,
- 20 000
Efficiency Variance of DL = ______________________________
,
=
,
0 1 x 10 000 9 000
q Actual Quantity of DL = ______________________________
=
.
, ,
8 000
q Standard Quantity of DL for Actual Output = ______________________________
,
$20
q Budgeted DL Price = ______________________________
30
Efficiency Variance of DM
Actual Budget
q Do firms use more or fewer direct inputs than they “should use” for the actual output? Price of DM $28 $30

Actual Quantity of Input (used for actual production)
Output 10,000 12,000
22 000 units
= Actual Input per Output * Actual Output = ______________________________
,
Standard Quantity of Input for Actual Output

= The number of inputs “should be used” for the actual output
20 000 units
= Standard Input per Output * Actual Output = ______________________________
,
Efficiency Variance
= (Actual Quantity of Input – Standard Quantity of Input for Actual Output) * Standard Price of Input
(22 200 20 000) x 30 466 000 U
= ______________________________
=
-
, , ,
31
Efficiency Variance of DL
Actual Budget
q Do firms use more or fewer direct inputs than they “should use” for the actual output? Price of DM $28 $30
Price of DL $22 $20

Actual Quantity of Input (used for actual production)
= Actual Input per Output * Actual Output = 9
, 000 DCH
______________________________
Output 10,000 12,000

Standard Quantity of Input for Actual Output
= The number of inputs “should have been used” for the actual output
8 000 DLH
= Standard Input per Output * Actual Output = ______________________________
,
Efficiency Variance
= (Actual Quantity of Input – Standard Quantity of Input for Actual Output) * Standard Price of Input
=20 000 U
= ______________________________
1000 X 20 ,
32
Question(1/1):
An unfavorable flexible-budget variance for variable costs may be the result of ________.
A) using more input quantities than were budgeted
B) paying lower prices for inputs than were budgeted
C) selling output at a higher selling price than budgeted
D) selling less quantity compared to the budgeted
33
LO (5): Standard Costing – Price and Efficiency Variances
Flex-Bdgt OI Variance
= Actual – Flex-Bdgt
= $29,100 U
Flex-Bdgt Revenue Var Flex-Bdgt DM Var Flex-Bdgt DL Var Flex-Bdgt VMOH Var Flex-Bdgt FMOH Var
= $50,000 F = $21,600 U = $38,000 U = $10,500 U = $9,000 U
DM Price DM Efficiency DL Price DL Efficiency

Variance Variance Variance Variance
= $44,400 F = $66,000 U = $18,000 U = $20,000 U
Direct Material FB Variance = DM Price Variance + DM Efficiency Variance

21 , 600 U = 44, 400F + 66, 600 U
Direct Labor FB Variance = DL Price Variance + DL Efficiency Variance

38 , 000 U =
18 ,
000 4 + 20 000
, U
34
LO (5): Standard Costing – Price and Efficiency Variances
Formulas to decompose Flexible-Budget Direct Cost Variances
Standard Quantity Allowed for Actual

Actual Quantity *Actual Price Actual Quantity * Standard Price
Outputs * Standard Price
AQ *AP AQ *SP
SQ * SP
Price Variance Efficiency Variance
AQ * (AP – SP) (AQ – SQ) * SP
AP = Actual price per input

Flexible-Budget Direct Cost Variance SP = Standard price per input
AQ = Actual input quantity
AQ * AP – SQ * SP
SQ = Standard input quantity allowed for actual outputs
= Standard input per output * Actual outputs
35
Some general rules of the journal entries of standard costing
q Record the costs using “standards”
q Rule 1: Unfavorable cost variances are always debits

q Firms spend more than they “should have spent”
q Actual spending is income decreasing à debit (increasing) cost
q Rule 2: Favorable cost variances are always credits

q Firms spend less than they “should have spent”
q Actual spending is income increasing à credit (decreasing) cost
36
DM Purchase Actual Budget
Price of DM $28 $30

Since we assume that Webb company does not have DM inventory
Price of DL $22 $20
à DM usage = DM purchase DL per output 0.9 0.8
Output 10,000 12,000
à Webb company actually purchases DM = _________________________

22 200
, units
à These DM are in DM inventory before changing into WIP goods and then FG goods
37
Price of DM $28 $30

Thus, we need to record the three transactions under Standard Costing (SC): DM per output 2.22 2
Output 10,000 12,000

1. The purchase of DM is paid in cash = 22 , 200 x 28
=
$621 ,
600
Credit
q Cash is paid à _______________________ cash
(Debit or Credit) _______________ account
$666 000
2. The costs (value) of these 22,200 units of DM under Standard Costing = 22, 200 x 30
=
,
q 22,200 units of DM are moved into DM inventory

q Manager use “standard costing” to record the value of purchased DM
Debit
q _______________ PM
(Debit or Credit) _______________ $666 000
account by __________________
,
3. The difference between actual pay and the value of DM under Standard Costing =
F
q _______________ credit
(F or U) Variance à _________________ (Debit or Credit) Price Variance
38
q Record the DM Price Variance (44,400 F) at the time of purchase Price of DM $28 $30
q This is the earliest time possible to record this variance for control DM per output 2.22 2
q The actual units of DM is 22,200 Output 10,000 12,000
q Record the costs (value) of these 22,200 units of DM under standard costing
q Record the payment for these 22,200 units of DM
DR CR
The cost (value) of 22,200

DM $666, 000 units of DM under the
standard costing system
DM Price Variance $44, 400/F)
Cash $621 600 Actual payment in cash

,
39
Actual Budget
DM Usage
Price of DM $28 $30
q TMC = DM + DL + MOH DM per output 2.22 2
Output 10,000 12,000
Thus, we need to record the three transactions under SC:
30x2 x 10 000 $600 000

1. The DM costs to produce 10,000 outputs under Standard Costing = ______________________________
=
, ,
q This adds value to WIP goods before changing into FG

Debit
q _____________________ $600 000
(Debit or Credit) to WIP by ____________________
,
2. To produce 10,000 outputs, the firm needs to move 2.22 * 10,000 = 22,200 units out of DM inventory, and the
$666 000
value of these DM under Standard Costing = ______________________________
=
22 200 x 30 ,
,
$666 000
q Moving _______________
, value of DM out of the DM inventory
Credit
q _______________________ (Debit or Credit) to DM account
3. The price variance of DM = 66, 000 U
q ___________________
U Debit
(F or U) Variance à _______________ (Debit or Credit) Price Variance Account
40
DM Usage Actual Budget
q Isolate the DM Efficiency Variance (66,000 U) at the time the direct materials are used Price of DM $28 $30
q This is the earliest time possible to identify DM Efficiency Variance DM per output 2.22 2
Output 10,000 12,000
DR CR
Each output uses $60 DM under SC U total output

is 10, 000 units
WIP
↳ Dr . WIP $600 000 ,
DM Efficiency Variance $66 ,

000
22, 200 X 30
DM = $66 600
,
41
DL Usage and Purchase Actual Budget
q Isolate the DL Price Variance (18,000 U) and Efficiency Variances (20,000 U) at the Price of DL $22 $20
time labor is used DL per output 0.9 0.8

Output 10,000 12,000
q This is the earliest time possible to identify the DL Price and Efficiency Variances
DR CR
WIP $160 ,
000
DL Price Variance $18 ,

000
DL Efficiency Variance $20, 000
Cash $ 198 000

,
42
End of year adjustments – Write-off to COGS Approach
Close all temporary variance accounts
q Debit the temporary accounts that have credits before
q Credit the temporary accounts that have debits before
q The difference between total debits and credits are allocated to the COGS account
Direct Variance Account:

q DM Price Variance = 44,400 F q DL Price Variance = 18,000 U
q DM Efficiency Variance = 66,000 U q DL Efficiency Variance = 20,000 U
DR CR
DM Price Variance 44, 400
DM Efficiency Variance 66, 000
DL Price Variance 18, 000
DL Efficiency Variance 20, 000
CoGS 104, 000 -

44 000
,
= 59, 600
43
From the perspective of control, variances are isolated (recorded) at the earliest possible time
q DM Price Variance is calculated at the time materials are purchased
q DM Efficiency Variance is calculated at the time materials are used
q DL Price Variance and Efficiency Variance are calculated at the time direct labor is used
Managers take corrective actions as soon as when a variance is known

q Know Unfavorable DM Price Variance – Negotiating cost reductions from current suppliers or obtaining
price quotes from new suppliers
q Know Unfavorable DM or DL Efficiency Variance – Checking with the production line managers to see
how to improve production efficiency
44
Question(1/1):
If management experiences an unfavorable direct materials efficiency variance, which of the

following would NOT be the possible corrective action?
A) hire a better production line manager
B) provide additional training for the direct laborers
C) purchase higher quality materials
D) negotiate lower prices for material acquisition
45
Questions
46

ACCT 2121 Chapter 7 (To Student)(4)

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ACCT 2121 Chapter 7 (To Student)(4)

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ACCT 2121

Chapter 7: Flexible-Budget and Direct Cost

l OI = TR – COGS – Period Costs

Variance = Actual Amount – Budgeted Amount

Favorable Variance (F)

Budgeted Revenue = $18,000

Budgeted Variable MOH = $3,000

Unfavorable variance (U)

Budgeted Revenue = $30,000

Budgeted Variable MOH = $5,000

Actual Variable MOH = $6,000

Units Sold 12,000 10,000 12, 000 2000 U

Revenues $120 per output $1,250,000 1 440,

DL $16 per output $198,000 192, 000 6,

Variable MOH $12 per output $130,500 144 000 ,

Total Variable Costs $88/unit $950,100 1

Fixed MOH $276,000 for 12,000 units $285,000 276 ,

Operating Income $14,900 108 ,

Fixed MOH = $276,000 for 12,000 units

DL $16 per output $198,000 $19 80.

Variable MOH $12 per output $130,500 $13 .

Total Variable Costs $88 per unit $950,100 $ 95 . 01

CM $120 – $88 = $32 $299,900

Fixed MOH $276,000 for 12,000 units $285,000

Operating Income $14,900

The flexible budget is the hypothetical budget

Flexible-Budget Revenue Variance Actual FB

= Actual Revenue – Flexible-Budget Revenue = 5) 50 000 F,

= (Actual Price – Budgeted Price) * Actual Units Sold Price $125$120

Revenues $120 per output $1,250,000 1 , 200, 000 50, 000 F

DL $16 per output $198,000 160 ,

VMOH $12 per output $130,500 120 ,

Fixed MOH $23 per unit $285,000 276 ,

Static-Budget Fixed MOH = $276,000 for 12,000 units

Which of the following information is needed to prepare a flexible budget?

Sales-Volume Revenue Variance

= Flexible-Budget Revenue – Static-Budget Revenue

= Budgeted Selling Price * (Actual Output Quantity – Budgeted Output Quantity)

Budget Static Budget Flexible Budget Sales-Volume Variance

Revenues $120 per output $1,440,000 $1,200,000 240, 000 U

DL $16 per output $192,000 $160,000 320, 000 F

VMOH $12 per output $144,000 $120,000 240, 000 F

Total Variable Costs $1,056,000 $880,000 176 ,

Fixed Costs $23 per unit $276,000 $276,000 O

Operating Income $108,000 $44,000 64, 000 U

Budget Static Budget Flexible Budget Sales-Volume Variance

If actual sales < budgeted sales

Flex-Bdgt OI Variance Sales-Volume OI Variance

Static-Bdgt OI Variance = FB OI Variance + Sales-Volume OI Variance

$93,100 U = $29,100 U + $64,000 U

Flex-Bdgt OI Variance Sales-Volume OI Variance

Flex-Bdgt Var Flex-Bdgt Var Flex-Bdgt Var Flex-Bdgt Var

Direct inputs Indirect inputs

Price of DM The cost per unit of DM ($) $28 $30

Price of DL The cost per unit of DL ($) $22 $20

DM per output The units of DM to produce one output (units) 2 22

DL per output The units of DL to produce one output (units) 0 . 9 0.8

q Again, only “flex” the output

Standard input quantity (SQ) DL per output 0.9 0.8