Lecture 7 Flexible Budget and Variance Analysis Flashcards
Wjat are the four parts of the bugetary control process?
Wjat are the four parts of the bugetary control process are:
1) create a plan
2) implement plan
3) meseaure and record actual performance
4) compare actual performance with plan and calulctate differences
then it loops
What is variance in management accounting?
Variance: is the difference between an amount based on an actual result and the corresponding budgeted amount. The budgeted amount is a point of reference for making comparisons.
What is a favourbale variance in variance analysis?
A favorable variance: denoted F is a variance that increases operating income relative to the budgeted amount. For revenue items, F means actual revenues exceed budgeted revenues. For cost items, F means actual costs are less than budgeted costs.
what is an adverse variance in variance analysis?
An adverse variance: denoted A is a variance that decreases operating income relative to budgeted amount. Adverse variances are also called Unfavorable variances
define standard costing?
Standard Costing (SC) is the planned unit cost of products, components or services in a period.
main uses of SC are in:
performance measurement
control of processes (exception reporting)
valuation of stocks
establishment of selling prices
What is management by exception?
Management by exception: is the practice of concentrating on areas not operating as budgeted and giving less attention to areas operating as budgeted. In other words, managers usually pay more attention to areas with large variances.
Variances are also used in performance evaluation and to motivate managers. Production managers may have quarterly efficiency incentives linked to achieving a budgeted amount of operating costs
what is operating income?
operating income is the same opeeraitng profit in financial accounting
What are static budgets?
static budgets are prepared for a single planned level of activity.
performance evaluation is difficult when acutal activity differs from the planned level of activity.
Explain the difference between a static and flexed budget?
An original (static) budget: is based on the level of output planned at the start of the budget period. The original budget is called a static budget because the budget for the period is developed around a single (static) planned output level
while A flexed budget: calculates budgeted revenues and budgeted costs based on the actual output. The flexed budget is prepared at the end of the period
what is the main factor to consider when preparing a flexed or flexible budget?
Factor to consider: Account must be taken of the assumptions upon which the original ‘fixed budget’ was based. Such assumptions might include the constraint posed by limiting factors such as the production capacity.
What are the three steps in the budget ‘flexing’ process?
the three steps in the budget ‘flexing’ process are:
1) identify: identify the items which are fixed or vairable according to the level of output (e.g sales revenue, material, labor and variable O/H cost are varied with the volume but fixed O/H cost is not)
2) rearrange: rearrange the budget to actual operational level (e.g production / sales) and budgeted variable cost rates.
3) **calculate: ** calculate the differences in actual and budgeted operational cost
define price?
‘PRICE’ refers to one item only.
Define COST?
‘COST’ is the total expenditure for several items.
What is standard cost? quantity standards and price standards?
Standard Cost: ‘the planned unit cost of the products, components or services produced in a period’
Are price variances calculated in actual or standard quantities?
Price variances are always calculated at actual quantities.
Are quantities variances calculated in actual or standard prices?
Quantity variances are always calculated at standard prices.
can you remeber the useful table of variance?
(SP − AP) AQ (SQ − AQ) SP
Materials PRICE USAGE
Direct labour RATE EFFICIENCY
Variable overhead Expenditure EFFICIENCY
Total fixed overhead cost variance
under Marginal costing equation?
Total fixed overhead cost variance
(Marginal costing)
=
Actual FOH - Budgeted FOH
Total fixed overhead cost variance
under Absorption costing
equation?
Total fixed overhead cost variance
Actual FOH - Absorbed FOH
What are the causes for adverse variances in Materials Usage?
Reasons for adverse variances in material usage:
Poor performance by production department staff leading to high rates of scraps.
Sub-standard materials leading to high rate of scraps.
Faulty machinery causing high rates of scraps.
The purchase of inferior quality materials.
What are the causes for favourable variances in Materials Usage?
Reasons for favourable variances:
Good performance by production department staff.
What are the causes for adverse variances in materials price ?
causes for adverse variances in materials price:
Poor performance by purchasing department staff.
Changes in market conditions between setting the standards and the actual even
What are the causes for favourable variances in materials price ?
Reasons for favourable variances:
Purchase of inferior quality materials, which may lead to inferior product quality or more wastage.
what is Direct Labour Efficiency variance ?
Direct Labour Efficiency variance = the difference between the standard cost of the labour hours that should have been worked (as per standards) and standard cost of the hours that was actually worked.
(Standard Number of Hours – Actual Number of Hours) x Standard labour Rate
