- 1. Introduction to Management Accounting Flexible Budgets and
Variance Analysis Chapter 8
2. Favorable and Unfavorable Variances Profit RevenueCosts
Actual > ExpectedF F U Actual < Expected U U F Favorable
variances arise whenactual results exceed budgeted. Unfavorable
variances arise whenactual results fall below budgeted. Favorable
(F) versus Unfavorable (U) Variances 3. Static and Flexible Budgets
A static budget is prepared for only one level of a given type of
activity.Differences betweenactual results and the static budget
for levelof output achieved are static-budget variances. Learning
Objective 1 A flexible budget (variable budget) adjusts for
different levels of activities.Differencesbetween actual results
and the flexiblebudget are flexible-budget variances. 4. Flexible
Budget Formulas To develop a flexible budget, managers determine
revenue and cost behavior (within the relevant range) with respect
to cost drivers. Learning Objective 2 Note that the static budget
is justthe flexible budget for a single assumed level of activity.
5. Activity-Based Flexible Budget An activity-based flexible budget
is based on budgeted costs for each activity and related cost
driver. For each activity, costs depend on an different cost
driver. Learning Objective 3 6. Evaluation of Financial Performance
2) revenue or variable costs per unit of activity and fixed costs
per period were not as expected. Actual results may differ from the
master budget because... 1) sales and other cost-driver activities
were not the same as originally forecasted, or Learning Objective 4
7. Evaluation of Financial Performance Actual results at actual
activity level (1) Flexible-budget variances(2) = (1)-(3) Flexible
budget for actual sales activity (3) Sales-Activity Variance (4) =
(3)(5) Static Budget (5) Units 7,000 7,0002,000U9,000Sales $217,000
$217,000$62,000 U$279,000 Variable costs
158,2005,670U152,60043,600F196,200 Contribution margin
$58,730$5,670 U$64,400$18,400 U$82,800 Fixed costs 70,300300U70,000
70,000 Operating income $ (11,570)$5,970 U$(5,600)$18,400 U$12,800
8. Isolating the Causes of Variances Managers use comparisons among
actual results, master budgets, and flexible budgets to evaluate
organizational performance. 9. Isolating the Causes of Variances
Effectiveness is the degree to which a goal, objective, or target
is met. Performance may be effective, efficient, both, or neither.
Efficiency is the degree to which inputs are used in relation to a
given level of outputs. 10. Flexible-Budget Variances Total
flexible-budget variance = Total actual results Total
flexible-budget planned results Learning Objective 5 $5,970
Unfavorable Flexible-budget variancesActual results $(11,570)
Flexible budget $(5,600) 11. Sales-Activity Variances Total sales -
activity variance = Actual sales unit Master budgeted sales units
Budgeted contribution margin per unit (7,000 9,000) $9.20$18,400
Unfavorable Flexiblebudget Master budget = Activity-level variances
12. Setting Standards An expected cost is the cost that is most
likely to be attained. A standard cost is a carefully developed
cost per unit that should be attained. Perfection (ideal) standards
are expressions of the mostefficient performance possible under the
best conceivable conditions, using existing specifications and
equipment. No provision is made for waste, spoilage, machine
breakdowns, and the like. 13. Currently Attainable Standards... are
levels of performance that managers can achieve by realistic levels
of effort. They make allowances for normal defects, spoilage,
waste, and nonproductive time. 14. Trade-Offs Among Variances
Improvements in one area could lead to improvements in others and
vice versa. Likewise, substandard performance in one area may be
balanced by superior performance in others. 15. When to Investigate
Variances When should management investigate a variance? Many
organizations have developed such rules of thumb as investigate all
variances exceeding $5,000 or 25% of expected cost, whichever is
lower. 16. Comparison with Prior Periods Some organizations compare
the most recent budget periods actual results with last years
results for the same period. These comparisons are not as useful as
comparisonsof actual outcomes with planned results. 17.
Flexible-Budget Variance in Detail Standard per unit of output:
Std. inputsFlexible expectedBudget Amount DirectMaterial 5 pounds
$2 /pound$10 Direct Labor hour$16/hour $8 Std. priceexpected 18.
Variances from Material and Labor Standards Actual results for
7,000 units produced: Direct material Pounds purchased and used:
36,800 Price/pound: $1.90 Total actual cost: $69,920 Direct labor
Hours used: 3,750 Actual price (rate): $16.40 Total actual cost:
$61,500 19. Variances from Material and Labor Standards Units of
good output achieved Input allowed per unit of output Standard unit
price of input = Flexible Budget or Total Standard Cost Allowed 20.
Variances from Material and Labor Standards (1) (2) (3) Flexible
Actual Flexible BudgetCosts BudgetVariance DirectMaterials$69,920
*$70,000$80 F Direct Labor 61,500**$56,000 $5,500 U Standard
Direct-Labor Cost Allowed: 7,000 units X 1/2 hour X $16 per hour =
$56,000** Standard Direct-Materials Cost Allowed: 7,000 units X 5
pounds X $2.00 per pound = $70,000* 21. Price and Quantity
Variances Price variance: (Applied to labor is called a rate
variance) Quantity variance: (Often called usage or efficiency
variance) (Actual quantity used standard quantity allowed for
actual output) Standard price (Actual price Standard Price) Actual
quantity usedLearning Objective 6 22. PriceVariance Computations
Direct materials price variance: Direct labor price (rate)
variance: ($16.40 $16.00) per hour 3,750 hours = $1,500 U ($1.90
$2.00) per pound 36,800 pounds = $3,680 F 23. Quantity (Usage)
Variance Computations Direct-materials quantity variance:
Direct-labor quantity variance: [3,750 (7,000 )] hours $16 per hour
= $4,000 U [36,800 (7,000 5)] pounds $2 per pound = $3,600 U 24.
Favorable or Unfavorable Variance? To determine whether a variance
is Favorable orunfavorable, use logic rather than memorizing a
formula. A price variance is favorable is the actual price is less
than the standard. A quantity variance is favorable if the actual
quantity used is less than the standard quantity allowed. 25.
Direct Materials Flexible Budget Variance Direct-Labor
Flexible-budget variance: $1,500 unfavorable+ $4,000 unfavorable=
$5,500 unfavorable Direct-Materials Flexible-budget variance:$3,680
favorable+ $3,600 unfavorable= $80 favorable 26. Interpretation of
Price and Usage Variances Price and usage variances are helpful
because they provide feedback to those responsible for managing
inputs. Managers should not use these variances alone for decision
making, control, or evaluation. 27. Variable-Overhead Spendingand
Efficiency Variances A variable-overhead efficiency variance occurs
when actual cost-driver activity differs from the standardamount
allowed for the actual output achieved. A variable-overhead
spending variance occurs when the difference between the actual
variable overhead and the amount of variable overhead budgetedfor
the actual level of cost-driver activity. Learning Objective 7 28.
Variable-Overhead Variances variable-actual standard standard
overhead
cost-drivercost-drivervariable-overheadefficiencyactivityactivity
rate per varianceallowed cost-driver unit X = - variable-actual
standard actualoverhead variablevariable-overheadcost-driver
spending overheadrate per unitactivity varianceof cost-driver used
= X - 29. Fixed Overhead Spending Variance The difference between
actual fixedoverhead and budgeted fixed overhead Is the fixed
overhead spending variance. Learning Objective 8 30. End of Chapter
8 The End