Flexible Budgets, Variances And Mnagement Control

Question 1

Static budget

Answer 1

Budget based on one level of output, not adjusted or altered after it is set, regardless of ensuing changes in actual output

Question 2

Flexible budget

Answer 2

Adjusted in accordance with ensuing changes in actual output

Question 3

Differences between static and flexible

Answer 3

Static budget is calculated at the start of the period

Flexible budget is calculated at the end

Question 4

Budgeted amount

Answer 4

Benchmarking that is a point of reference form which comparisons may be made

Question 5

Comparisons include

Answer 5

Financial variables reported in a company’s own accounting system.
Non financial variables.
Financial variables not reported in a company’s own accounting system

Question 6

Favourable variance

Answer 6

Variance that increases operating profit relative to the budgeted amount

Question 7

Unfavourable variance

Answer 7

Variance that decreases operating profit relative to the budgeted amount

Question 8

Interpretation of variances

Answer 8

A favourable variance for revenue means that actual revenues exceeded budgeted revenues.
A favourable variance for cost items means that actual costs were less than budgeted costs.

Question 9

Static budget variance

Answer 9

Actual results - static budget

Question 10

When actual profit is lower than the budgeted profit

Answer 10

This gives an unfavourable variance

Question 11

Five step approach to develop flexible budget

Answer 11

1) determine budgeted selling price, budgeted variable cost per unit and budgeted fixed cost
2) Determine the actual quantity of revenue drivers
3) Determine the flexible budget for revenues based on budgeted selling price and actual quality of output.
4) Determine the quantity of cost drivers
5) Determine the flexible budget for costs based on the budgeted unit variable costs and fixed costs and the actual quantity of the cost driver.

Question 12

Flexible-budget variance

Answer 12

captures the difference between the actual results and the flexible budget.
Provides details on existent variances between the actual and budgeted prices or quantities of inputs.
Actual results - Flexible budget

Question 13

Sales volume variance

Answer 13

Flexible budget - Static budget

Question 14

Price variance

Answer 14

(Actual price - Budgeted price) x Actual quantity of inputs

Question 15

Efficiency variance

Answer 15

(Actual quantity - Budgeted quantity for actual output) x Budgeted price

Question 16

When actual profit is lower than the budgeted profit

Answer 16

This gives an unfavourable variance

Question 17

Two attributes of performance

Answer 17

Effectiveness is the degree to which a predetermined objective or target is met.

Efficiency is the reactive amount of inputs used to achieve a given level of output.

Question 18

Management uses of a variances

Answer 18

Variances needs a careful analysis and understanding of the context.
It can be inadequate to use a single variance as a performance measure for managers.

Question 19

Continuous improvement budget cost

Answer 19

This is a budget cost that is successively reduced over succeeding time period.

Question 20

Causes of variance (examples)

Answer 20

Poor design of products or services
Poor quality of materials from suppliers
Poor work in manufacturing area
Inadequate training of the workforce
Inappropriate assignment of labour or machines to jobs
Congestion due to scheduling a large number of rush orders

Question 21

Financial and non financial performance

Answer 21

Recommendable to not rely on one only type of performance measurement rather than concentrating only on economic impacts.
E.g: observation of workers, quality of work etc

Question 22

When should variances be investigated

Answer 22

Frequently managers base their answers on subjective judgements.
For critical items, a small variable may prompt follow up.
For other items, a minimum monetary variance or a certain percentage of variance from budget may prompt an investigation

Question 23

Impact of stock

Answer 23

Interpretations on variances may change when opening and closing stocks exist.
Many organisations direct material variances based on quantities purchased in one only accounting period.

Question 24

Possible causes for price variances

Answer 24

Purchasing manager negotiated more skilfully than was planned.
Labour prices were set without careful analysis of the market

Question 25

Possible causes for efficiency variances

Answer 25

Purchasing manager received lower quality of materials
The personal manager hired under-skilled workers.
The maintenance department did not properly maintain machines.

Question 26

Activity based costing systems

Answer 26

They focus more on individual activities as the fundamental cost object.
ABC systems classify the cost of various activities into a cost hierarchy - output - unit level, batch - level, product sustaining and facility sustaining.

Question 27

Output unit level costs - top of ABC

Answer 27

Materials costs and direct manufacturing labour costs are examples of output unit level costs

Question 28

Batch level costs - ABC HIERARCHY

Answer 28

They are resources sacrificed on activities that are related to a group of units of products or services rather than to each individual unit of product or service.

Question 29

Approach to develop ABC Flexible Budget

Answer 29

Step 1: Using the budgeted batch size, calculate the number of batches in which the actual output units should have been produced.

Step 2: Using the budgeted material-handling labour-hours per batch, calculate the number of materials-handling labour hours that should have been used.

Step 3: Using the budgeted cost per material handling labour-hour calculate the flexible-budget amount for material-handling labour hours.

Question 30

Benchmarking and variance analysis

Answer 30

Refers to the continuous process of measuring products, services and activities against the best levels of performance.
The best levels of performance are often found in competing organisations or in other organisations having similar processes.
Companies should ensure that the benchmark numbers are comparable.

Question 31

Manufacturing overheads examples

Answer 31

Variable - energy, engineering support, indirect materials and indirect manufacturing labour

Fixed - administrative costs (managers salaries, rent, depreciation and property taxes

Question 32

Planning variable overheads

Answer 32

Value added- if eliminated, it would reduce the value customers obtain from using the product or service

Non-value added- if eliminated, it would not reduce the value customers obtain from using the product or service.

An effective plan of variable overheads involves undertaking only value-added costs

Question 33

Planning fixed overheads

Answer 33

An effective plan of fixed overheads involves undertaking only value-added costs and undermine the level of these activities

Question 34

Fixed overhead costs

Answer 34

They are a lump sum that remains unchanged in total for a given time period despite wide changes in the related total activity or output level.
Total fixed costs are frequently included in flexible budgets.
But total fixed overheads remain the same total amount within the relevant range regardless of output level chosen.

Question 35

Fixed costs

Answer 35

Unaffected by changes in the level of output
Flexible budget = static budget
No adjustment is required for differences between the actual output and the budgeted output for fixed costs

Question 36

Production-volume variance

Answer 36

Budgeted fixed overhead

(-) fixed overhead allocated

Question 37

Infrastructure costs

Answer 37

Arise from having property, plant and equipment and a functioning organisation.
E.g depreciation and rent

Question 38

Discretionary costs

Answer 38

Two features:
1) arise from periodic usually yearly decisions regarding the maximum outlay to be incurred and
2) they have no clearly measurable cause and effect relationship between costs and outputs
E.g R&D, executive training and consultancy

Question 39

Engineered costs

Answer 39

Result specifically from a clear cause and effect relationship between costs and output
E.g direct material

Question 40

Important to include non-financial performance measures to understand variances, for example.

Answer 40

“Actual indirect material usage in meters per machine hour compared with budgeted indirect materials usage in meters per machine hour”

Question 41

Activity based costing and variance analysis

Answer 41

ABC systems classify costs of various activities into a coat hierarchy (output unit level, batch level, product sustaining and facility sustaining)
The basic principles and concepts for variable and fixed manufacturing overhead costs can be extended to ABC systems.
Flexible budgeting in activity based costing sutras enables insight into why actual activity costs differ from those budgeted.