1 / 51

Chapter 8

Chapter 8. Flexible Budgets and Variance Analysis. Distinguish between flexible budgets and master (static) budgets. Learning Objective 1. Static Budgets. Static budget is really just another name for master budget.

gary-dean
Télécharger la présentation

Chapter 8

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 8 Flexible Budgets and Variance Analysis

  2. Distinguish between flexible budgets and master (static) budgets. Learning Objective 1

  3. Static Budgets • Staticbudget is really just another name for master budget. • A master budget is prepared for only one level of a given type of activity. • All actual results are compared with the original budgeted amounts, even if sales volume is less than originally planned.

  4. Performance Report Performance report is a generic term that usually means a comparison of actual results with some budget. Variance is a deviation of an actual amount from the expected or budgeted amount.

  5. Master Budget Variance: Revenue The variances of actual results from the master budget are called master (static) budget variances. Actual Budget Variance $400,000 $380,000 $20,000 F $370,000 $380,000 $10,000 U

  6. Master Budget Variance: Expenses Actual expenses that exceed budgeted expenses result in unfavorable expense variances. Actual expenses that are less than budgeted expenses result in favorable expense variances.

  7. Use flexible-budget formulas to construct a flexible budget based on the volume of sales. Objective 2

  8. Flexible Budget • A flexible budget (variable budget) is a budget that adjusts for changes in sales volume and other cost-driver activities.

  9. Flexible Budget Formulas The flexible budget is based on the same assumptions of revenue and cost behavior (within the relevant range) as is the master budget. The flexible budget incorporates effects on each cost and revenue caused by changes in activity.

  10. Prepare an activity-based flexible budget. Objective 3

  11. Activity-Based Flexible Budget • An activity-based flexible budget is based on budgeted costs for each activity and related cost driver. • Within each activity center, costs depend on an appropriate cost driver. • Activity-based flexible budgets provide more accurate measures of cost behavior.

  12. Understand the performance evaluation relationship between master (static) budgets and flexible budgets. Objective 4

  13. Performance Evaluation Using Flexible Budgets Comparing the flexible budget to actual results accomplishes an important performance evaluation purpose.

  14. Performance Evaluation Using Flexible Budgets • There are basically two reasons why actual results might differ from the master budget. • Sales and other cost-driver activities were not the same as originally forecasted. • Revenue or variable costs per unit of activity and fixed costs per period were not as expected.

  15. Performance Evaluation Using Flexible Budgets The intent of using the flexible budget for performance evaluation is to isolate unexpected effects on actual results that can be corrected if adverse or enhanced if beneficial.

  16. Compute flexible-budget variances and sales-activity variances. Objective 5

  17. Flexible-Budget Variances Actual Results Flexible Budget Flexible Budget Variances

  18. Flexible-Budget Variances Flexible Budget Master Budget Activity-Level Variances

  19. Distinguish Between Effectiveness and Efficiency Effectiveness is the degree to which a goal, objective, or target is met. Efficiency is the degree to which inputs are used in relation to a given level of outputs.

  20. Isolating the Causes of Variances • Managers use comparisons among actual results, master budgets, and flexible budgets to evaluate organizational performance. • Performance may be effective, efficient, both, or neither.

  21. Flexible-Budget Variances Total flexible-budget variance = Total actual results – Total flexible budget for actual sales activity level

  22. Sales-Activity Variances Total sales-activity variance = Actual sales unit – Master budgeted sales units × Budgeted contribution margin per unit

  23. Compute and interpret price and usage variances for inputs based on cost-driver activity. Objective 6

  24. Expectations, Standard Costs, and Standard Cost Systems • Expectations or standard costs are the building blocks of a planning and control system.

  25. Expectations, Standard Costs, and Standard Cost Systems • 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. • Standard cost systems are accounting systems that value products according to standard costs only.

  26. Perfection Standards... • or ideal standards, are expressions of the most efficient performance possible under the best conceivable conditions, using existing specifications and equipment. • No provision is made for waste, spoilage, machine breakdowns, and the like.

  27. Currently Attainable Standards... • are standards based on levels of performance that can be achieved by realistic levels of effort. • Allowances are made for normal defects, spoilage, waste, and nonproductive time.

  28. 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.

  29. When to Investigate Variances When should variances be investigated? Knowing exactly when to investigate is difficult. Many organizations have developed such rules of thumb as “investigate all variances exceeding $5,000 or 25% of expected cost, whichever is lower”.

  30. Flexible-Budget Variance Example Standard per unit of output: Direct Direct MaterialLabor Std. inputs expected 5 pounds ½ hour Std. price expected $ 2 $16 Std. cost expected $10 $ 8

  31. Flexible-Budget Variance Example Actual results for 7,000 units produced: Direct labor Hours used: 3,750 Actual price (rate): $16.40 Total actual cost: $61,500 Direct material Pounds purchased and used: 36,800 Price/pound: $1.90 Total actual cost: $69,920

  32. Flexible-Budget Variance Example Units of good output achieved Input allowed per unit of output × × Standard unit price on input Flexible budget (or total standard cost allowed) =

  33. Flexible-Budget Variance Example Standard Direct-Materials Cost Allowed Units of good output achieved: 7,000 Input allowed per unit of output: 5 pounds × × Standard unit price on input: $2 per pound Flexible budget (or total standard cost allowed): $70,000 =

  34. Flexible-Budget Variance Example Flexible Budget $70,000 Actual Cost $69,920 Direct material flexible budget variance = $80 F

  35. Flexible-Budget Variance Example Standard Direct-Labor Cost Allowed Units of good output achieved: 7,000 Input allowed per unit of output: ½ hour × × Standard unit price on input: $16 per hour Flexible budget (or total standard cost allowed): $56,000 =

  36. Flexible-Budget Variance Example Flexible Budget $56,000 Actual Cost $61,500 Direct labor flexible budget variance = $5,500 U

  37. Price Variance Computations Direct-material price variance = Actual price – Standard price Actual quantity × = ($1.90 – $2.00) per pound × 36,800 pounds = $3,680 favorable

  38. Price Variance Computations Direct-labor price variance = Actual price – Standard price Actual quantity × = ($16.40 – $16.00) per hour × 3,750 hours = $1,500 unfavorable

  39. Price Variance Computations Direct-material usage variance = Actual quantity – Standard quantity Standard price × = [36,800 – (7,000 × 5)] pounds × $2.00 per pound = $3,600 unfavorable

  40. Price Variance Computations Direct-labor usage variance = Actual quantity – Standard quantity Standard price × = [3,750 – (7,000 × ½)] hours × $16 per hour = $4,000 unfavorable

  41. Favorable or Unfavorable Variance? • To determine whether a variance is favorable or unfavorable, use logic rather than memorizing a formula.

  42. Effects of Inventories • What if production does not equal sales? • The sales-activity variance then is the difference between the static budget and the flexible budget for the number of units sold. • In contrast, the flexible-budget cost variances compare actual costs with flexible-budgeted costs for the number of units produced.

  43. Compute variable overhead spending and efficiency variances. Objective 7

  44. Variable Overhead Variances Efficiency variance Spending variance

  45. Variable-Overhead Efficiency Variance When actual cost-driver activity differs from the standard amount allowed for the actual output achieved, a variable-overhead efficiency variance will occur.

  46. Variable-Overhead Spending Variance... • is the difference between the actual variable overhead and the amount of variable overhead budgeted for the actual level of cost-driver activity.

  47. Flexible-Budget Variance Example Suppose that Dominion Company’s cost of supplies, a variable-overhead cost, is driven by direct-labor hours. Standard variable overhead rate per unit of output: $0.60 per unit or $1.20 per direct labor hour ½ hour is allowed per unit of output

  48. Flexible-Budget Variance Example Actual variable overhead = $4,700 Variable overhead allowed = $.60 × 7,000 units = $4,200 $500 unfavorable variance

  49. Price Variance Computations Variable-overhead efficiency variance = Actual direct labor hours – Standard hours Standard rate per hour × = (3,750 actual hours – 3,500 standard hours allowed) × $1.20 per hour = $300 unfavorable

  50. Price Variance Computations Variable-overhead spending variance = Actual variable overhead Expected rate per hour × Actual direct-labor hours used = – ($4,700 – ($1.20 × 3,750 hours) = $200 unfavorable

More Related