Flexible Budget

Question 1

Master Budget (static budget)

Answer 1

Expresses management’s operating and financial plans for a specified period

Prepared before the start of the period. So every value listed is budgeted (budgeted units, budgeted costs, selling prices, etc.)

Question 2

Actual Results

Answer 2

At the end of the period, when all actual results are observed, we can prepare the actual income statement

Question 3

Variances

Answer 3

The difference between an actual operating result and a budgeted amount for the operation

There are many types of variances (units, $$, income, costs)

Question 4

Favorable Variances (F)

Answer 4

Has the effect of increasing short-run operating profits

If actual Sales > budgeted Sales then variance is F

If actual Cost < budgeted costs then variance is F

Question 5

Unfavorable variance (U)

Answer 5

Has the effect of decreasing short-run operating profit

If actual sales < budgeted sales then the variance is U

If actual costs > budgeted costs then the variance is U

Question 6

Flexible Budget

Answer 6

The budget that adjusts revenues and variable expenses to the actual output level achieved

Actual sales volume is used, but with the budgeted selling price per unit, budgeted variable cost per unit, and budgeted total fixed costs

Goal is determine WHY actual results differ from what was expected

Question 7

Flexible vs. Master Budgets

Answer 7

MB is based solely on the planned volume of activity

FB shows expected revenues and costs at the actual volume

FBs helps manager to compare “apples to apples” when assessing performance

Question 8

Variance decomposition

Answer 8

Process of explaining the total operating income variance

Question 9

First-level decomposition

Answer 9

Flexible Budget Variance = Actual Results - Flexible Budget

Sales Volume Variance = Flexible Budget - Master Budget

Question 10

Master Budget Variance

Answer 10

Total Flexible Budget Variance + Total Sales Volume Variance

Question 11

Causes for Sales Volume Variance

Answer 11

Market for the product has changed

General economic conditions have changed (unexpected events, crisis)

Firm lost or gained market share versus competitors

Firm dud bit set a reasonable goal

Firm set an inappropriate selling price

Marketing and promotion programs were more or less effective than expected

Question 12

Total Flexible Budget Variance

Answer 12

Difference between actual operating income of the period and the flexible budget based on output (same units, but costs and selling prices per unit differ)

Measures the effect of efficiencies in using resources on expenses, contributions margins, and operating income

Also measures the effects changes in selling prices of output units on sales revenues and subsequent effects on contribution margin and operating income

Question 13

Second-level decomposition

Answer 13

Sales Price Variance = Actual Sales $ - Flexible Budget Sales $

OR Actual Unites Sold x (Actual Sale Price per Unit - Budgeted Sale Price per Unit)

Question 14

SG&A Expenses Variances

Answer 14

Total Fixed Cost Variance = Actual Fixed Costs - Flexible Budget Fixed Cost

Question 15

Manufacturing Cost Variances

Answer 15

Total Variable Cost Variance = Actual Variable Costs - Flexible Budget Variable Costs

Question 16

Direct Materials Variance

Answer 16

Need to evaluate whether the costs to manufacture each unit were used EFFICIENTLY (not wasting resources)

The overall expense for materials depends upon how much we use the materials and how much the materials costs

The materials variance reflects efficiency or inefficiency in buying or using direct materials

Compares Actual DM Cost vs Flexible Budget DM Cost
AQ x AP vs. SQ x SP

If AP doesn’t equal SP, then DM prices differ

If AQ doesn’t equal SQ, DM usage differ

Question 17

Direct Labor Variance

Answer 17

AH x AR - SH x SR

Question 18

Management Use of Variances

Answer 18

Variances can have multiple causes

Variances can’t be interpreted in isolations of each other

Managers investigate variances based on subjective judgements (investigate only material variances)

The goal of variance analysis is for managers to understand why variances arise, to learn, and to improve their firm’s future performance