l Business Publishing, l Business Publishing, Introduction to Management Accounting Introduction to Management Accounting 14/e, 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgsta Horngren/Sundem/Stratton/Schatzberg/Burgsta Flexible Budgets and Flexible Budgets and Variance Analysis Variance Analysis Chapter 8 Chapter 8 Introduction to Management Introduction to Management Accounting Accounting
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Static and Flexible BudgetsStatic and Flexible Budgets
A static budget is prepared for only one levelA static budget is prepared for only one levelof a given type of activity. Differences between of a given type of activity. Differences between
actual results and the static budget for level actual results and the static budget for level of output achieved are static-budget variances.of output achieved are static-budget variances.
LearningLearningObjective 1Objective 1
A flexible budget (variable budget) adjustsA flexible budget (variable budget) adjustsfor different levels of activities. Differences for different levels of activities. Differences
between actual results and the flexible between actual results and the flexible budget are flexible-budget variances.budget are flexible-budget variances.
Evaluation of Financial Evaluation of Financial PerformancePerformance
2) revenue or variable costs per unit of activity and2) revenue or variable costs per unit of activity andfixed costs per period were not as expected.fixed costs per period were not as expected.
Actual results may differ fromActual results may differ fromthe master budget because...the master budget because...
1) sales and other cost-driver activities were1) sales and other cost-driver activities werenot the same as originally forecasted, ornot the same as originally forecasted, or
Isolating the Causes of VariancesIsolating the Causes of Variances
Managers use comparisons amongManagers use comparisons among actual results, master budgets,actual results, master budgets,and flexible budgets to evaluateand flexible budgets to evaluate
Isolating the Causes of VariancesIsolating the Causes of Variances
Effectiveness is the degree to whichEffectiveness is the degree to whicha goal, objective, or target is met.a goal, objective, or target is met.
Performance may be effective,Performance may be effective,efficient, both, or neither.efficient, both, or neither.
Efficiency is the degree to which inputs areEfficiency is the degree to which inputs areused in relation to a given level of outputs.used in relation to a given level of outputs.
Total flexible-budget varianceTotal flexible-budget variance= Total actual results= Total actual results–– Total flexible-budget planned resultsTotal flexible-budget planned results
An expected cost is the cost thatAn expected cost is the cost thatis most likely to be attained.is most likely to be attained.
A standard cost is a carefullyA standard cost is a carefullydeveloped cost per unitdeveloped cost per unitthat should be attained.that should be attained.
Perfection (ideal) standards are expressions of the most Perfection (ideal) standards are expressions of the most efficient performance possible under the best conceivableefficient performance possible under the best conceivableconditions, using existing specifications and equipment.conditions, using existing specifications and equipment.
No provision is made for waste, spoilage,No provision is made for waste, spoilage,machine breakdowns, and the like.machine breakdowns, and the like.
Currently Attainable Standards...Currently Attainable Standards...
are levels of performance thatare levels of performance thatmanagers can achieve bymanagers can achieve byrealistic levels of effort.realistic levels of effort.
They make allowances for normalThey make allowances for normaldefects, spoilage, waste,defects, spoilage, waste,and nonproductive time.and nonproductive time.
Trade-Offs Among VariancesTrade-Offs Among Variances
Improvements in one area could lead toImprovements in one area could lead toimprovements in others and vice versa.improvements in others and vice versa.
Likewise, substandard performanceLikewise, substandard performancein one area may be balanced byin one area may be balanced bysuperior performance in others.superior performance in others.
Comparison with Prior PeriodsComparison with Prior Periods
Some organizations compare the mostSome organizations compare the mostrecent budget period’s actual results withrecent budget period’s actual results with
last year’s results for the same period.last year’s results for the same period.
These comparisons are not as useful as comparisons These comparisons are not as useful as comparisons of actual outcomes with planned results.of actual outcomes with planned results.
Variances from Material and Labor Variances from Material and Labor StandardsStandards
(1)(1) (2) (2) (3) (3)FlexibleFlexible
Actual Actual Flexible Flexible Budget Budget CostsCosts Budget Budget VarianceVariance
DirectDirect Materials Materials $69,920 $69,920 *$70,000 *$70,000 $ 80 F $ 80 FDirect LaborDirect Labor 61,500 61,500 **$56,000 **$56,000 $5,500 U $5,500 U
Standard Direct-Labor Cost Allowed:Standard Direct-Labor Cost Allowed:7,000 units X 1/2 hour X $16 per hour = $56,000**7,000 units X 1/2 hour X $16 per hour = $56,000**
Standard Direct-Materials Cost Allowed:Standard Direct-Materials Cost Allowed:7,000 units X 5 pounds X $2.00 per pound = $70,000*7,000 units X 5 pounds X $2.00 per pound = $70,000*
Price and Quantity VariancesPrice and Quantity Variances
(Actual quantity used – standard quantity allowed(Actual quantity used – standard quantity allowedfor actual output) × Standard pricefor actual output) × Standard price
(Actual price – Standard Price) × Actual quantity used (Actual price – Standard Price) × Actual quantity used
Favorable or Unfavorable Variance?Favorable or Unfavorable Variance?
To determine whether a variance is Favorable or To determine whether a variance is Favorable or unfavorable, use logic rather than memorizing a formula.unfavorable, use logic rather than memorizing a formula.
A price A price variance is variance is favorable is favorable is the actual the actual
price is less price is less than the than the standard.standard.
A quantity A quantity variance is variance is
favorable if the favorable if the actual quantity actual quantity
used is less than used is less than the standard the standard
Variable-Overhead Spending Variable-Overhead Spending and Efficiency Variancesand Efficiency Variances
A variable-overhead efficiency variance occurs whenA variable-overhead efficiency variance occurs whenactual cost-driver activity differs from the standard actual cost-driver activity differs from the standard
amount allowed for the actual output achieved.amount allowed for the actual output achieved.
A variable-overhead spending variance occurs whenA variable-overhead spending variance occurs when the difference between the actual variable overheadthe difference between the actual variable overhead
and the amount of variable overhead budgeted and the amount of variable overhead budgeted for the actual level of cost-driver activity.for the actual level of cost-driver activity.
variable- variable- actual actual standard standard standard standardoverhead overhead cost-driver cost-driver variable-overhead cost-driver cost-driver variable-overhead efficiency efficiency activity activity activity activity rate per rate pervariance variance allowed allowed cost-driver unit cost-driver unit
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variable- variable- actual actual standard standard actual actual overhead overhead variable variable-overhead cost-driver variable variable-overhead cost-driverspendingspending overhead overhead rate per unit rate per unit activityactivityvariance variance of cost-driver of cost-driver usedused