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.
