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-tions 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.
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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.
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EXERCISES
E131
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
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E132
a.
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A
B
C
D
1
NELL COMPANYMACHINING 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
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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 its getting worse, given the level of production for the first three months.
366
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E133
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
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E134
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
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