In this section you examine what happens when the master budget plan deviates significantly from the assumptions used to develop it. When deviation from the master budget becomes apparent, one of the possible causes is that actual costs were not known when the master budget was developed and standard costs were used. Standard costs are those costs that management expects to incur to provide a good or service and are typically stated as a cost per unit. Standard cost is based on the combination of price (or rate) and quantity (or hours) . They serve as the “standard” by which performance will be evaluated and are used to produce the master budget.
This section continues the story of Jerry’s Ice cream – follow along and document how they used standard costs to develop a master budget and how that contributes to variance from the actual results. You should note that a standard cost is a per unit cost while a master budget cost is total cost at a given standard level of activity/standard quantity of units.