Budget & Variances Flashcards
Responsibility accounting
System that measures the plans, budgets, actions and actual results of each responsibility centre.
Performance of manager
Economic performance of the entity/unit - uncontrollable items
Variance
Difference between actual results and expected/budgeted/planned performance.
Static budget
Based on the level of output planned at the start of the budget period.
Standard cost
Carefully determined/budgeted cost for one unit of input/output of product.
Static budget variance
The difference between the actual result and the static budget. (Level 1)
Static budget favourable variance
Actual costs < Budgeted costs
Increase in operating profit compared to budget.
Static budget unfavourable variance
Actual costs > Budgeted costs
Decrease in operating profit compared to budget.
Flexible budget
Calculates budgeted revenues and budgeted costs based on the actual output in the budget period. (Level 2)
Flexible budget volume
Actual output
Flexible budget standard price, variable cost and total fixed costs
Is the same as the static budget
Flexible budget variance
The difference between the actual result and the flexible budget.
Two reasons for flexible budget variances
Quantity & Price
To flex a budget we need to know that:
- Total variance costs change in direct proportion to changes in activity.
- Total fixed costs remain unchanged within the relevant range.
Management’s use of variances
- Used to evaluate performance.
- Standard cost are used to control and guide managers investigations of variances.
- Improve future performance.
Info to purchasing manager for DM
- Standard price vs Actual price
- Why they have paid more or less than they should have.
Info to production manager
- Actual Q of inputs vs Standard Q in making actual output.
- Efficiency in using inputs to create outputs.
Info to HR/production manager for DL
- Labour rate
- Overtime hours, timetabling of work, rush order.
Normal costing allocate MOH
= a budgeted/predetermined allocation rate * AQ of CAB
Standard costing - traces direct costs to output produced
= standard price or rate * standard Q of input allowed for actual outputs
Standard costing - allocates OH
= standard OH rates * standard Q of CAB allowed for the actual outputs
Standard costing FB variances
= actual costs - FB
actual costs = FB + FB variances
Unfavourable variance Journal entry
An extra expense –> Profit decreases –> Debit
Favourable variance Journal entry
Lower expense –> Profit increases –> Credit
