Presentation on theme: "Chapter 7: Flexible Budgets, Variances, and Management Control: I"— Presentation transcript: 1 Chapter 7: Flexible Budgets, Variances, and Management Control: I Show
2 Basic Concepts Variance – difference between an actual and an expected (budgeted) amount Management by Exception – the practice of focusing
attention on areas not operating as expected (budgeted) Static budget – a budget prepared for only one level of activity It is based on the level of output planned at the start of the budget period. The master budget is an example of a static budget. Flexible budget – revenues or costs considered justified by the actual output level of the budget period A key difference between a flexible budget and a static budget is the use of
the actual output level in the flexible budget. In general, flexible budgets can also be conditioned on actual levels of other external influences serve to implement responsibility accounting
3 Basic Concepts Static-Budget Variance (Level 0) – the difference between the actual result and
the corresponding static budget amount Favorable Variance (F) – has the effect of increasing operating income relative to the budget amount Unfavorable Variance (U) – has the effect of decreasing operating income relative to the budget amount
4 Variances Variances may start out “at the top” with a Level 0 variance 5 A Simple Example Operating Indicators:
6 A Simple Example Level 1 Analysis Level 0 Analysis
7 Flexible Budget Flexible Budget – shifts budgeted revenues and costs up and down based on actual operating
results (activities) Represents a blending of actual activities and budgeted dollar amounts Will allow for preparation of Levels 2 and 3 variances Answers the question: “Why were we off?” 8 A Flexible-Budget Example 9 Level 2 analysis provides information on the two components of the static-budget variance.
Flexible-budget variance: (Actual – budgeted contribution margin/unit) × actual sales mix × actual units sold Sales-volume variance: (Actual units sold × actual sales mix – budgeted units sold × budgeted sales mix) × × budgeted contribution margin/unit
10 Level 3 Variances All Product Costs can have Level 3 Variances. Direct Materials and Direct Labor will be handled next. Overhead Variances are discussed in detail in a later chapter Both Direct Materials and Direct Labor have both Price and Efficiency Variances, and their formulae are the same
11 Remark The above split-up has been derived by introducing the flexible budget between static budget and actual values:
static budget variance (level 1) = budgeted # of units * budgeted $ per unit – actual # of units * budgeted $ per unit + actual # of units * budgeted $ per unit – actual # of units * actual $ per unit Flexible budget variance Sales volume variance 160 155 Flex. Budg. Variance F Sales volume variance U Formally, a similar split-up could have been derived by
developing a „flexible budget 2“ as follows static budget variance (level 1) = budgeted # of units * budgeted $ per unit – budgeted # of units * actual $ per unit + budgeted # of units * actual $ per unit – actual # of units * actual $ per unit 160 155 Flex. Budg. Variance F Sales volume variance U
12 Variances and Journal Entries 13 Sources of Information 14 Cost budgeting, procedure... 15 Cost absorption charge rate = tg a = KP
/xP,
16 Standard Costing Budgeted amounts and rates are actually booked into the accounting system These budgeted amounts contrast with actual activity and give rise to Variance
accounts Reasons for implementation: Improved software systems Wide usefulness of variance information 17 Management Uses of Variances 18 Efficiency Variance, graphical
19 Cost budgeting and control, Formulas 20 Possible Causes of unfavorable Efficiency Variances
21 Flexible-budget variance for direct materials 22 Flexible-budget variance for direct manufacturing
labor?
23 Separating price and quantity components
24 Activity-Based Costing and Variances 25 Benchmarking and Variances 26 Possible Causes of unfavorable Efficiency Variances 27 Multiple Causes of Variances
28 Quiz 1. Flexible budgets a. accommodate changes in the inflation rate.
29
Bartholomew Corporation’s master budget calls for the production of 6,000 units of product monthly. The master budget includes indirect labor of $396,000 annually; Bartholomew considers indirect labor to be a variable cost. During the month of September, 5,600 units of product were produced, and indirect labor costs of $30,970 were incurred. A performance report utilizing flexible budgeting would report a flexible budget variance for indirect labor of a. $170 U b. $170
F. c. $2,030 U. d. $2,030 F. Which of the following is not an advantage for using standard costs for variance analysis? a. Standards simplify product costing. b. Standards are developed using past costs and are available at a relatively low cost. c. Standards are usually expressed on a per unit basis. d.
Standards can take into account expected changes planned to occur in the budgeted period. 30 5. Information on Pruitt Company’s
direct-material costs for the month of July 2005 was as follows: 31 6. Information for Garner Company’s direct-labor costs for the month of September 2005 is as follows:
Actual direct-labor hours 34,500 hours Standard direct-labor hours 35,000 hours Total direct-labor payroll $241,500 Direct-labor efficiency variance—favorable $ 3,200 What is Garner’s direct-labor price (or rate) variance? a. $21,000 F b. $21,000 U c. $17,250 U d. $20,700 U
32 Problems 7-17 (=11)(5%), 7-23 (=11.7-21)(8%), 7-21 (7%),
33 7-17 Actual costs Static budget Variance Budgeted resource prices per case Direct materials Direct manufact.
labor Direct distribution labor $ 78 000 $ 80 000 $ F 2,000 F F $40 8 12 Actual output: cases Revised performance report based on a flexible budget?
34 7-23 Budgeted sales: 7.8 million minutes Actual sales: 7.5 million 35
7-21 Budgeted production: 60 000 scones
36 7-37 Standard direct costs per board: Data for July:
37 7-39 Direct material Direct manufacturing labor: Actual data of May: 38
7-41 39 7-43 Flexible Budget variance What is a flexible budget performance report?Definition: A flexible budget performance report is a management report that compares the actual revenues and costs for a period with the budgeted revenues and costs based on the actual sales volume.
What is the main purpose of a flexible budget?Flexible budgeting can be used to more easily update a budget for which revenue or other activity figures have not yet been finalized. Under this approach, managers give their approval for all fixed expenses, as well as variable expenses as a proportion of revenues or other activity measures.
What type of analysis does flexible budget reports help managers perform?The flexible budget performance report helps management to perform variance analysis. Recall that in the flexible budget performance report, the actual results, flexible budget, and static budget are included.
What is a flexible budget statement?A flexible budget is a type of budgeting that adjusts to a company's activity or profit margins. This type of budget also accounts for variable costs, continuously changes according to changes in costs or revenue. This approach means that businesses can anticipate any potential increases or decreases in monetary needs.
|