Ch 7 Flashcards
Static budget variance
Difference btw actual result and corresponding
Budgeted amount in static budget
Static budget AKA Master budget, what is it based on?
Static budget is based on the level of output planned
At the start of the budget period
flexible budget?
Calculates budgeted revenues and budgeted costs based on actual output level of the Budget period
Why is it useful to develop a flexible budget?
Flexible budgets help managers gain more insight into
the causes of variances than is available from static budget
Variance
Difference btw actual results and expected performance
Budgeted performance
Expected performance
Different point of reference for making comparisons
Management by exception
Focusing management attention on areas that are not
Operating as expected
And devoting less time to areas operating as expected
Favorable variance F
Has effect when considered in isolation Of
increasing operating income relative to budgeted amount
Unfavorable variance
Has effect when considered in isolation Of
decreasing operating income relative to budgeted amount
Static budget variance equation
Static budget variance for operating income =
Actual result) - (static budget amount
3 steps of developing flexible budget
Step 1 Identify actual quantity of output
Step 2 calculate flexible budget revenues
Step 3 calculate flexible budget for costs
Sales volume variance
Difference btw flexible budget amount and
corresponding static budget amount
Flexible budget variance
Difference between actual result and corresponding
Flexible budget amount
Sales volume variance for operating income equation?
Sales volume variance for operating income =
flexible budget amount) - (static budget amount
Flexible budget variance equation?
Flexible budget variance =
Actual result) - (flexible budget amount
Selling price variance equation?
Selling price variance =
(actual selling price - budgeted selling price) X actual units sold
2 subdivisions of flexible budget variance for direct cost inputs?
1 price variance that reflects difference between actual
input price and budgeted input price
2 efficiency variance that reflects difference between
actual input quantity and budgeted input quantity
Standard
Carefully determined price, cost or quantity used as
Benchmark for judging performance
Standard input, 2 examples?
Carefully determined quantity of input
Ex square yards of cloth or direct manufacturing labor hours
Standard price
Carefully determined price a company expects to
Pay for a unit of input
Standard cost
Carefully determined cost of unit of output
Standard cost per output unit for each variable direct cost input equation?
Standard cost per output unit for
Each variable direct cost input. =
(Standard input allowed for one output unit)
X (standard price price per input unit)
Price variance AKA Input price variance AKA Rate variance, equation
Price variance =
(actual price of input - budgeted price of input) X actual quantity
Of input
Efficiency variance equation?
Efficiency variance =
(actual quantity input used - budgeted quantity of input allowed)
For actual output
X budgeted price of input
5 Possible operational causes of variance across value chain?
1 poor design of products or processes
2 poor work on production line because underskilled
Workers/ faulty machines
3 inappropriate assignment of labor or machines to
Specific jobs
4 congestion due to scheduling large # orders
From sales representatives
5 suppliers not manufacturing uniformly high quality
Material
Performance measurement using variance: effectiveness
degree to which Predetermined objective or target is met
Performance measurement using variance: efficiency
Relative amount of inputs used to achieve given output
Level
Goal of variance analysis
For managers to understand why variances arise,
To learn and improve future performance
Benchmarking
Continuos process of comparing levels of performance in producing products, services, activities against best levels
Of performance in competing companies w similar processes
What is the purpose of a standard cost?
The purposes of standard costs are to exclude past
Inefficiencies
and take into account changes
Expected to occur in budget period
How do managers use variances, 6 ways, in isolation?
For control, decision implementation, performance
Evaluation, organization learning and continuous improvement
Use multiple variances at same time
Market share variance equation?
Market share variance =
(actual market size in units)
X (actual market share - budgeted market share)
X (budgeted contribution margin per unit)
Market size variance equation
Market size variance =
(actual market size - budgeted market size)
X (budgeted market share)
X (budgeted contribution margin per unit)
Developing flexible budget step 2: calculate flexible budget revenues based on…
budgeted selling price and actual quantity of output
Developing flexible budget step 3: calculate flexible budget for costs based on …
budgeted variable cost per output unit,
Actual quantity of output and budgeted fixed costs
