Flexible Budgets and Variance Analysis

Question 1

When do you prepare a static budget?

Answer 1

A static budget is prepared at the start of an accounting period.

Question 2

When do you prepare a flexible budget?

Answer 2

A flexible budget is prepared at the end of an accounting period – after actual production or sales volumes are known.

Question 3

What is variance analysis?

Answer 3

Variance analysis is the process of comparing your actual performance against your flexible budget.

Question 4

Why would a manager want to know if they have a Direct Labour Quantity variance?

Answer 4

How long staff take to complete a job is important for planning future budgets, staff training, hiring and firing decisions. Direct Labour Quantity variance can help identify if there are any problems with your staff completing their tasks in the estimated time frame.

Question 5

Why would a manager want to know if they have a Direct Material Price variance?

Answer 5

The materials represent a large cost to a business.
Understanding if you were able to buy the material at a price higher or lower than budgeted may have ramifications for the pricing, and profitability of your products.

Question 6

Explain how an ‘Unfavourable’ variance may actually be good for the business.

Answer 6

An unfavourable variance means a higher price, or a larger quantity of material or labour was used relative to the budgeted expectations. A higher price paid for labour may be a good thing if you hired higher quality employees. A larger amount of material used may be a good thing if it leads to improved product quality, and fewer defects and complaints.