Explain the difference between static and flexible budgets.
A static budget is prepared once and does not affect or change the actual volume of output. On the other hand, the Flexible budget changes with the actual output volume.
A static budget is prepared based on estimated expenditure and revenue of a particular period at a single sales level.
The budget prepared for a single level of sales is known as a static budget.
The budget prepared for different sales levels is known as a flexible budget.
A static budget is rigid because it is related to only one sales level.
It is flexible and used for what-if analysis.
Describing master budget components
Sarah Edwards, division manager for Pillows Plus, is speaking to the controller, Diana Rothman, about the budgeting process. Sarah states, “I’m not an accountant, so can you explain the three main parts of the master budget to me and tell me their purpose?” Answer Sarah’s question.
Preparing the financial budget—budgeted balance sheet
Barker, Inc. has the following balance sheet at December 31, 2018:
Barker projects the following transactions for 2019:
Sales on account, $20,000
Cash receipts from customers from sales on account, $17,600
Purchase of raw materials on account, $7,000
Payments on account, $3,500
Total cost of completed products, $16,600, which includes the following:
Raw materials used, $7,100
Direct labor costs incurred and paid, $3,900
Manufacturing overhead costs incurred and paid, $4,800
Depreciation on manufacturing equipment, $800
Cost of goods sold, $14,800
Selling and administrative costs incurred and paid, $500
Purchase of equipment, paid in 2019, $2,000
Prepare a budgeted balance sheet for Barker, Inc. for December 31, 2019. (Hint: It may be helpful to trace the effects of each transaction on the accounting equation to determine the ending balance of each account.)
Computing and journalizing standard cost variances
Moss manufactures coffee mugs that it sells to other companies for customizing with their own logos. Moss prepares flexible budgets and uses a standard cost system to control manufacturing costs. The standard unit cost of a coffee mug is based on static budget volume of 59,800 coffee mugs per month:
Direct material (0.2 lbs. @$0.25 per lb)
Direct Labor (3 minutes @ $0.11 per minute)
Variable (3 minutes @ $0.06 per minute)
Fixed (3 minutes @ $0.13 per minute)
Total Cost per Coffee Mug
Actual cost and production information for July 2018 follows:
a. There were no beginning or ending inventory balances. All expenditures were on account.
b. Actual production and sales were 62,500 coffee mugs.
c. Actual direct materials usage was 11,000 lbs. at an actual cost of $0.17 per lb.
d. Actual direct labor usage was 197,000 minutes at a total cost of $25,610.
e. Actual overhead cost was $10,835 variable and $29,765 fixed.
f. Selling and administrative costs were $95,000.
1. Compute the cost and efficiency variances for direct materials and direct labor.
2. Journalize the purchase and usage of direct materials and the assignment of direct labor, including the related variances.
3. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances.
4. Journalize the actual manufacturing overhead and the allocated manufacturing overhead. Journalize the movement of all production costs from Work-in-Process Inventory. Journalize the adjusting of the Manufacturing Overhead account.
5. Moss intentionally hired more highly skilled workers during July. How did this decision affect the cost variances? Overall, was the decision wise?
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