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Budgeting and Standard Cost Systems

CHAPTER 13

BUDGETING AND STANDARD COST SYSTEMS

CLASS DISCUSSION QUESTIONS

1. The three major objectives of budgeting are

(1) to establish specific goals for future op-erations, (2) to direct and coordinate plans to achieve the goals, and (3) to periodically compare actual results with the goals.

2. Managers are given authority and responsi-bility for responsibility center performance. They are then accountable for the perfor-mance of the responsibility center.

3. If goals set by the budgets are viewed as unrealistic or unachievable, management may become discouraged and may not be committed to the achievement of the goals, resulting in the budget becoming less effec-tive as a planning and control tool.

4. Budgeting more resources for travel than requested by department personnel is an ex-ample of budgetary slack.

5. A budget that is set too loosely may fail to mo-tivate managers and other employees to per-form efficiently. In addition, a loose budget may cause a “spend it or lose it” mentality, where excess budget resources are spent in order to protect the budget from future reductions.

6. Conflicting goals can cause employees or department managers to act in their own self-interests to the detriment of the organiza-tion’s objectives.

7. Zero-based budgeting is used when an or-ganization wishes to take a “clean slate” view of operations. It is often used when the or-ganization wants to cut costs by reevaluating the need for and usefulness of all operations.

8. A static budget is most appropriate in situations where costs are not variable to an underlying activity level. As a result, it is reasonable to plan spending on the basis of a fixed quantity of resources for the year. This will occur in some administrative functions, such as human resources, accounting, or public relations.

9. Computers not only speed up the budget-ing process, but they also reduce the cost of

budget preparation when large quantities of data need to be processed. In addition, by using computerized simulation models, man-agement can determine the impact of various operating alternatives on the master budget.

10. The first step in preparing a master budget is preparing the operating budgets, which form the budgeted income statement. The first operating budget to be prepared is the sales budget.

11. The production requirements must be care-fully coordinated with the sales budget to ensure that production and sales are kept in balance during the period. Ideally, manufac-turing operations should be maintained at 100% of capacity, with no idle time or over-time, and there should be neither excessive inventories nor inventories insufficient to fill sales orders.

12. Purchases of direct materials should be closely coordinated with the production bud-get so that inventory levels can be main-tained within reasonable limits.

13. Direct materials purchases budget, direct labor cost budget, and factory overhead cost budget.

14. a.The cash budget contributes to effectivecash planning. This involves advance planning so that a cash shortage does not arise and excess cash is not permit-ted to remain “idle.”

b. The excess cash can be invested in readily marketable income-producing securities or used to reduce loans.

15. The schedule of collections from sales is used to determine the amount of cash col-lected from current- and prior-period sales, based on collection history. The schedule is used to help determine the estimated cash receipts portion of the cash budget.

16. The plans for financing the capital expendi-tures budget may affect the cash budget.

363

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

17. Standard costs assist management in con-trolling costs and in motivating employees to focus on costs.

18. Management can use standards to assist in achieving control over costs by investigating significant deviations of performance (vari-ances) from standards and taking corrective action.

19. Reporting by the “principle of exceptions” is the reporting of only variances (or “excep-tions”) between standard and actual costs to the individual responsible for cost control.

20. There is no set time period for the revision of standards. They should be revised when prices, product design, labor rates, and manufacturing methods change to such an extent that current standards no longer rep-resent a useful measure of performance.

21. Standard costs for direct materials, direct labor, and factory overhead per unit of prod-uct are used in budgetary performance evaluation. Product standard costs are mul-tiplied by the planned production volumes. Budget control is achieved by comparing actual results with the standard costs at ac-tual volumes.

22. a.The two variances in direct materialscost are:

(1) Price

(2) Quantity

b. The price variance is the result of a difference between the actual price and the standard price. It may be caused by such factors as a change in market prices or inefficient purchasing proce-dures. The quantity variance results from using more or less materials than the standard quantity. It can be caused by such factors as excessive spoilage, care-lessness in the production processes, and the use of inferior materials.

23. The offsetting variances might have been caused by the purchase of low-priced, infe-rior materials. The low price of the materials would generate a favorable materials price variance, while the inferior quality of the materials would cause abnormal spoilage and waste, thus generating an unfavorable materials quantity variance.

24. a.The two variances in direct labor costsare:

(1) Rate

(2) Time

b. The direct labor cost variance is usually under the control of the production su-pervisor.

25. No. Even though the assembly workers are covered by union contracts, direct labor cost variances still might result. For example, direct labor rate variances could be caused by scheduling overtime to meet production de-mands or by assigning higher-paid workers to jobs normally performed by lower-paid work-ers. Likewise, direct labor time variances could result during the training of new workers.

26. Standards can be very appropriate in repeti-tive service operations. Fast-food restau-rants can use standards for evaluating the productivity of the counter and food prepara-tion employees. In addition, standards could be used to plan staffing patterns around var-ious times of the day (e.g., increasing staff during the lunch hour).

27. Nonfinancial performance measures provide managers additional measures beyond the dollar impact of decisions. Nonfinancial considerations may help the organization include external customer perspectives about quality and service in performance measurements.

364

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

EXERCISES

E13–1

A

B

C

D

1

AGENT BLAZE

2

Flexible Selling and Administrative Expenses Budget

3

For the Month Ending January 31, 2010

4

Total sales

$100,000

$

125,000

$

150,000

5

Variable cost:

6

Sales commissions

$

8,000

$

10,000

$

12,000

7

Advertising expense

21,000

26,250

31,500

8

Miscellaneous selling expense

3,000

3,750

4,500

9

Office supplies expense

4,000

5,000

6,000

10

Miscellaneous administrative expense

2,000

2,500

3,000

11

Total variable cost

$ 38,000

$

47,500

$

57,000

12

Fixed cost:

13

Miscellaneous selling expense

$

2,250

$

2,250

$

2,250

14

Office salaries expense

15,000

15,000

15,000

15

Miscellaneous administrative expense

1,600

1,600

1,600

16

Total fixed cost

$ 18,850

$

18,850

$

18,850

17

Total selling and administrative expenses

$ 56,850

$

66,350

$

75,850

.0/msohtmlclip1/01/clip_image002.jpg”>

365

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

E13–2

a.

.0/msohtmlclip1/01/clip_image003.gif”>

A

B

C

D

1

NELL COMPANY—MACHINING DEPARTMENT

2

Flexible Production Budget

3

For the Three Months Ending March 31, 2010

4

January

February

March

5

Units of production

110,000

100,000

90,000

6

7

Wages

$495,000

$450,000

$405,000

8

Utilities

33,000

30,000

27,000

9

Depreciation

60,000

60,000

60,000

10

Total

$588,000

$540,000

$492,000

11

12

Supporting calculations:

13

Units of production

110,000

100,000

90,000

14

Hours per unit

×

0.25

× 0.25

× 0.25

15

Total hours of production

27,500

25,000

22,500

16

Wages per hour

× $18.00

× $18.00

× $18.00

17

Total wages

$495,000

$450,000

$405,000

18

19

Total hours of production

27,500

25,000

22,500

20

Utility cost per hour

×

$1.20

× $1.20

× $1.20

21

Total utilities

$ 33,000

$ 30,000

$ 27,000

.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image006.gif”>.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image007.gif”>.0/msohtmlclip1/01/clip_image007.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image011.gif”>.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image007.gif”>.0/msohtmlclip1/01/clip_image007.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image008.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image009.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image010.gif”>.0/msohtmlclip1/01/clip_image010.gif”>

Depreciation is a fixed cost, so it does not “flex” with changes in production. Since it is the only fixed cost, the variable and fixed costs are not classified in the budget.

b.

January

February

March

Total flexible budget ……………………..

$588,000

$540,000

$492,000

Actual cost……………………………………

600,000

570,000

545,000

…Excessofactualcostoverbudget

$ (12,000)

$ (30,000

)

$ (53,000

)

The excess of actual cost over the flexible budget suggests that the Machining Department has not performed as well as originally thought. Indeed, the depart-ment is spending more than would be expected, and it’s getting worse, given the level of production for the first three months.

366

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

E13–3

A

B

C

D

1

STEELCASE INC.—FABRICATION DEPARTMENT

2

Flexible Production Budget

3

October 2010

4

(assumed data)

5

Units of production

12,000

15,000

18,000

6

7

Variable cost:

84,0001

105,0002

126,0003

8

Direct labor

$

$

$

9

Direct materials

783,0004

978,7505

1,174,5006

10

Total variable cost

$

867,000

$1,083,750

$

1,300,500

11

12

Fixed cost:

13

Supervisor salaries

$

140,000

$

140,000

$

140,000

14

Depreciation

22,000

22,000

22,000

15

Total fixed cost

$

162,000

$

162,000

$

162,000

16

Total department cost

$1,029,000

$1,245,750

$

1,462,500

17

112,000

18

× 20/60 × $21

19

215,000

× 20/60 × $21

20

318,000

× 20/60 × $21

21

412,000

× 45 × $1.45

22

515,000

× 45 × $1.45

23

618,000

× 45 × $1.45

.0/msohtmlclip1/01/clip_image013.jpg”>

367

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

E13–4

a.

A

B

C

D

1

HARMONY AUDIO COMPANY

2

Sales Budget

3

For the Month Ending September 30, 2009

4

Unit Sales

Unit Selling

Product and Area

Volume

Price

Total Sales

5

Model DL:

6

East Region

3,700

$125

$

462,500

7

West Region

4,250

125

531,250

8

Total

7,950

$

993,750

9

Model XL:

10

East Region

3,250

$195

$

633,750

11

West Region

3,700

195

721,500

12

Total

6,950

$

1,355,250

13

Total revenue from sales

$

2,349,000

b.

A

B

C

1

HARMONY AUDIO COMPANY

2

Production Budget

3

For the Month Ending September 30, 2009

4

Units

5

Model DL

Model XL

6

Expected units to be sold

7,950

6,950

7

Plus desired inventory, September 30, 2009

275

52

8

Total

8,225

7,002

9

Less estimated inventory, September 1, 2009

(240)

(60)

10

Total units to be produced

7,985

6,942

368

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