Flexed Budgets and Variances - Lecture 7b

Question 1

What is budgetary control based on?

Answer 1

– Comparing actual performance to planned performance (budget)
to find differences (variances)
– Then taking corrective action and/or revising the plan

Question 2

Why do variations from budgets occur?

Answer 2

1. The volume of activity was different from planned.
2. Unit costs differed from planned (i.e. usage changed from planned) and/or unit prices changed from planned.

Question 3

Flexed budget formula:

Answer 3

Original budget figure * ( actual activity level / original budgeted activity level)

Question 4

What does a flex budget do?

Answer 4

Shows how the budget would have appeared had we known the actual production level in advance

Question 5

What is a favourable variance

Answer 5

When it benefits the business

Question 6

What is an adverse variance?

Answer 6

When is it not good for the business

Question 7

Why do fixed costs not get ‘flexed’

Answer 7

They are fixed costs that do not rise or fall in direct proportion to output

Question 8

What is standard costing?

Answer 8

A system of financial control that allows costs/price changes to be analysed in more detail in order to control cost more effectively.

• it relates to standard cost by unit of output
  -it is often used in budget construction
  -provides target costs that should be incurred under efficient, operating conditions
  -used in budgetary control process to allow detailed analysis, so that cost can be controlled more effectively
• most suited to repetitive operations where the input to each unit of output can be specified

Question 9

What is standard cost?

Answer 9

Predetermined cost calculated in relation to a prescribed set of working conditions, correlating, technical specifications, and scientific measurements of material, and labour prices and wage rates expected to apply during the period to which the standard cost is intended to relate with an addition of an appropriate share of the budgeted overhead.

Question 10

Standard setting process

Answer 10

Setting standards:
– Specification
– Standard material list
– Standard pricelist
– Standard operation list
– Budgeted overheads

Question 11

What could the standard process be based on?

Answer 11

– Past historical records
– Engineering studies

Question 12

Types of standard

Answer 12

-Basic
-ideal
-attainable

Question 13

What is the BASIC type of standard?

Answer 13

Basic is left unchanged over long periods

Question 14

What is the IDEAL type of standard?

Answer 14

Represent perfect performance, minimum costs under most efficient operating conditions

Question 15

What is the ATTAINABLE type of standard?

Answer 15

Difficult and not impossible to achieve, allows for normal wastage and spoilage

Question 16

Why is standard setting done?

Answer 16

–Standards are set for all elements of cost and product prices.
– Comparing each of these standards with actual costs, and prices identifies variances
– Then investigated to explain the reasons for occurrence
– Analysis of these variances provides a more detailed account of the budgeted profit was not achieved

Question 17

Summary of the control process

Answer 17

– Set standard cost.
– Compare standard cost with actual
– Calculate total variance
– Analyse variances
– Consider responsibility and controllability
– Explain reasons for variation
– Take action