Chapter 7 lecture Flashcards
the difference between actual results and expected (budgeted) performance
variance
the practice of focusing attention on areas not operating as expected (budgeted)
management by exception
is based on the level of output planned at the start of the budget period
static budget
is the differnece between the actual result and the corresponding static budget amount
static budget variance
has the effect, when considered in isolation, of increasing operating incomoem realtive to the budget amount
favorable variance
has the effect, when viewed in isolation, of decreasing operating income relative to the budget amount
unfavorable variances
variances start where
at the bottom level with level 0
this is the highest level of analysis and is nothing more than the difference between actual and static budget
operating income
examine the level 0 variance, breaking it down into progressively more detailed levels of analysis
levels 1, 2, and 3
How mmuch were we off in total?
level 0
Where were we off
level 1 variance
actual operating income vs static budget operating income
level 0 variance
actual line items vs static budget line items
level 1 variance
calculates budgeted revenues and budgeted costs based on the actual output in the budget period
flexible budget
when is the flexible budget prepared
at the end of the period, after managers know the actual output
is the hypothetical budget that would have been prepared at the start of the budget period if the company had correctly forecast the actual ouput for the period (an approximation of what should have happened)
flexible budget
why were we off?
level 2 variance
actual line items vs flexible budget line items; static budget line items vs flexible budget line items
level 2 variance
level 2: flexible budget variance equation
level 2: flexible budget variance =
actual results - flexible budget amount
level 2: sales volume variance equation
level 2: flexible budget variance =
flexible budget amount - static budget amount
what causes a level 2 sales revenue variance
actual output (unit volume)
what causes a level 2 flexible budget variance
- actual input quantities (efficiency variances)
- actual input rates (price variances)
and why is that?
level 3 variance
actual input price vs budgeted input price; actual input quantity vs budgeted input quantity
level 3 variance
price variance equation
price variance =
(actual price of input - budgeted price of input) * actual quantity of input
efficiency variance equation
efficiency variance =
(actual quantity of input used - budgeted quantity of input allowed for actual output) * budgeted price of input
3 sources to obtain budgeted input quantities and budgeted input prices
- actual input data from past periods
- data from other companies that have similar processes
- standards developed by the firm itself
advantages:
- real rather than hypothetical; can serve as a useful benchmark
- typically easy to collect at a low cost
disadvantages:
- past circumstances are incorporated into past data. therefore the data do not represent the performance the firm could have ideally attained, only the performance it achieved in the past
- similarly, does not incorporate changes or improvement expected for the budget period (such as improvements resulting from new investments in technology.)
which of the 3 sources to obtain budgeted input quantities and budgeted input prices is this ?
actual input data fromm past periods
advantages:
- can provide a firm useful information about how its performing relative to its competitors
disadvantages:
- input price and input quantity data from companies are often proprietary and not available
- such information may also be unique to that companys processes or situation and not directly comparable to another companys situation
which of the 3 sources to obtain budgeted input quantities and budgeted input prices is this ?
data from other companies that have similar processes
advantages:
- avoids past circumstances from influencing the current period
- takes into account expected changes or improvements for the budget period
disadvantages:
- are not real or actual amount; hypothetical; educated guess
- may be used as an ideal or goal by management, which can sometimes be slightly unattainable or out of reach for employees
which of the 3 sources to obtain budgeted input quantities and budgeted input prices is this ?
standards developed by the firm itself
3 types of standards
- standard input
- standard price
- standard cost
is a carefully determined quantity of input
example: square yards of cloth required for one unit of output, such as a jacket
which of the 3 standards is this?
standard input
is a carefully determined price a company expects to pay for a unit of input
example: standard wage rate the firm expects to pay workers
which of the 3 standards is this?
standard price
is a carefully determined cost of a unit of output
examples: standard direct manufacturing labor cost of a jacket
which of the 3 standards is this?
standard cost
_______ is to square as ______ is to rectangle
standard is to square as budget is to rectangle
journal entry for:
identify direct materials price variance when they are purchased
Dr. direct materials control
Cr. direct materials price variance
Cr. accounts payable control
journal entry for:
identify direct materials efficiency variance when they are used
Dr. work in process control
Dr. direct materials efficiency variance
Cr. direct materials control
journal entry for:
identify direct labor price and efficiency variances when they are used
Dr. work in process control
Dr. direct manufacturing labor price variance
Dr. direct manufacturing labor efficiency variance
Cr. wages payable control
journal entry for:
write off price and variances at end of period
Dr. COGS
Dr. direct materials price variance
Cr. direct materials efficiency variance
Cr. direct manufacturing labor price variance
Cr. direct manufacturing labor efficiency variance
