Chapter 7: Flexible Budgets, Direct-Cost Variances, and Management Control Flashcards
What is a variance?
The difference between actual results and expected performance.
What is management by exception?
Focusing on areas not operating as expected (budgeted).
What is a static budget (master budget)?
What is unique about this type of plan?
Focuses on the level of output planned at the start of the budget period.
It is a single plan that does not change once created.
What is a static budget variance?
The difference between the actual result and the static budget amount. (Level 1)
Actual Result
-
Static Budget Amount
What is a favorable variance (F)?
Increase operating income relative to the budget amount.
What is an unfavorable variance (U)?
Decreases operating income relative to the budget amount.
What is a flexible budget?
Calculates budgeted revenues and budgeted costs based on the actual output in the budget period.
How do you develop a flexible budget?
- Id the actual quantity of output
- Calculate the flexible budget for revenues
- Calculate the flexible budget for costs
How do you calcuate the flexible budget for revenues?
Budgeted Sellng Price
x
Actual Quantity of Output
How do you calcualte the flexible budget for costs?
Budgeted Variable Cost per output unit
x
Actual Quantity of Output
+
Budgeted Fixed Costs
What is a flexible-budget variance?
The difference between an actual result and the corresponding flexible-budget amount. (Level 2)
What is the sales-volume variance?
The difference between a flexible-budget amount and the corresponding static-budget amount. (Level 2)
Flexible-budget amount
-
Static-budget amount
What is a price variance?
Where do you see these variances?
The difference between an actual input price and a budgeted input price. (Level 3)
Direct materials and direct labor exhibit this variance.
(Actual price of input - Budgeted price of input)
x
Actual quantity input
What is an efficiency variance?
The difference between an actual input quantity and a budgeted input quantity. (Level 3)
(Actual quanity of input used - Budgeted quantity of input allowed for actual output)
x
Budgeted price of input
What is quantity allowed as it relates to variances?
Amount of materials or labor that should have been used for a given level of production
What is standard costing?
Costing system that traces direct costs to output produced by multiplying the standard rates by the standard quantities of inputs allowed for actual outputs produced and allocates overhead costs on the basis of the standard overhead-cost rates times the standard quantities of the allocation bases allowed for the actual outputs produced.
How is standard costing useful?
- Provides feedback
- Controls costs
- Evaluates performance
- Encourages continuous improvement
What is benchmarking?
Comparing performace against best performance of competitors.
What is the sales-volume variance for operating income?
Budgted contribution margin per unit
x
(Actual units sold - Static budget units sold)
or
(Budgeted selling price - Budgeted variable cost per unit)
x
(Actual units sold - Static budget units sold)
What is the selling-price variance?
The difference between the actual selling price and the budgeted selling price.
(Actual selling price - Budgeted selling price)
x
Actual units sold
What is the standard cost per unit for each variable direct-cost input?
Standard input allowed for one output unit
x
Standard price per input unit
What is the hierarchy of variances?
Static-budget variance for operating income
- Sales-volume variance for operating income
- Flexible-budget variance for operating income
- Selling price variance
- Direct materials variance
- Direct materials price variance
- Direct materials efficiency variance
- Direct labor variance
- Direct labor price variance
- Direct labor efficiency variance
- Variable overhead variance
- Fixed overhead variance
Calculate actual operating income using variance information.
Static-budget operating income
+ Sales-volume variance for operating income
= Flexible-budget operating income
Flexible-budget variances for operating income:
Selling-price variance
+/- Direct materials variances:
Direct materials price variance
+ Direct materials effciency variance
= Direct materials variance
+/- Direct labor variances:
Direct labor price variance
+ Direct labor efficiency variance
= Direct labor variance
+/- Variable overhead variance
+/- Fixed overhead variance
+/- Flexible-budget variance for operating inomce
Actual operating income
