Budgeting and Variance Analysis: Key Concepts & Formulas
Chapter 22: Budgeting – Strategic Planning, Measurement, Evaluation, and Control
Sales: Estimates the quantity of sales and prior year’s sales as a starting point. Static: One activity level. Once the budget is determined, it doesn’t change even with activity changes. Production: Estimates the number of units to be manufactured to meet budgeted sales and desired inventory goals. Flexible: Shows expected results of a responsibility center for many activity levels. Master: Operating & financial budgets for a period of time (yearly). Includes sales budget, production budget, DM purchases budget, DL cost budget, factory overhead cost budget, selling and administrative expenses budget, COGS budget, & budgeted income statement. Too Loose: Not accomplishing much. Too Tight: Too much change, turnover increases. Conflicting: Giving incentive to do more, but results in sales declining.
Sales Budget
Budget Revenue = Expected Sales Volume x Expected unit sales price
Production Budget
Total Units to be Produced = Expected Units to be Sold + Desired Units in Ending Inventory – Estimated Units in Beginning Inventory
Direct Materials Purchases Budget
- Determine Budgeted Direct Material for Production:
Budgeted DM Required for Production = Budgeted Production Volume x DM Quantity Expected per Unit
- DM Quantity to be Purchased = Step 1 + Desired Ending Materials Inventory – Estimated Beginning Materials Inventory
- Budgeted DM to be Purchased by Unit Price = Step 2 x Unit Price
Direct Labor Cost Budget
- Determine Budgeted Direct Labor Hours Required for Production:
Budgeted DL Hours Required for Production = Budgeted Production Volume x DL Hours Expected Per Unit
- Determine Total Direct Labor Costs:
Direct Labor Costs = Step 1 x Hourly Rate
Factory Overhead Cost Budget
Fixed, we have to afford this.
COGS Budget
Looks at DM, DL (WIP), Finished Good Inventory.
Selling & Administrative Expenses Budget
DM + WIP Inventory – COGS Manufactured = COGS. Selling Expenses + Admin Expenses = Total Selling & Admin Expenses
Budgeted Income Statement
Gross Profit = Revenue – COGS. Gross Profit – (Selling and Admin Expenses Budget) + (Other Revenue and Expenses) = Net Income. (+) Keep going, (-) Firing/Layoffs or close down.
Cash Budget
40% Prior Month’s Sales on Account, 60% Current Month’s Sales on Account. Cash Collected (40%) + Cash Collected (60%) = Total Receipts From Sales on Account
Estimated Cash Payments with Depreciation
- Budgeted Manufacturing Cost – Depreciation = Manufacturing Cost
- Multiply %
- Add both % values = Total Payments
2 events x 3 days = 6 fully booked days, 6 days x 120 rooms = 720 rooms, 20 days – 6 days = 14 days @ 60% capacity, (60% x 14 days) x 120 rooms = 1008 rooms, (40% x 120 rooms) x 1/2 x 2 events = 48 rooms for extended-stay guests, 720 + 1008 + 48 = 1776 rooms to clean in April, (1776 rooms x 35 min.) / 60 min = 1036 hrs, 1036 hrs x $16/hr = $16576 housekeeping budget for April
Chapter 23: Evaluating Variances from Standard Costs
Ideal Standard: Achieved only under perfect operating conditions with no idle time, no machine breakdowns, and no material spoilage. Normal Standard: Attainable standards, normal production difficulties and mistakes. Budget Performance Report: Summarizes actual costs, standard costs, and the difference for the units. Unfavorable Cost Variance: The actual cost exceeds the standard cost (+). Favorable Cost Variance: The actual cost is less than the standard cost (-)
Standard Cost Calculations
Standard Cost per Unit = Standard Price x Standard Quantity
Standard Cost at Actual Volume = Volume # x Standard Cost per Unit
Cost Variance (F/U) = Actual Cost – Standard Cost at Actual Volume (+U/-F)
Total Manufacturing Cost Variance includes DM, DL, & Factory overhead cost variance
Total DM variance: Price and quantity. Total DL Variance: rate and time.
