Lecture 8 Flashcards
To separate the effects of sales volume you need:
A budget that adjusts according to changes in the number of units sold
Price variance
How did prices of inputs deviate from expectations
= (act. input price - Bud. input price) * actual quantity of input
Efficiency variance
How much input should have been used for the actual output compared to how much was actuallly used
= (Actual quantity of input - budgeted quantity of input for actual output) * Budgeted input price
Mix variance
How did the mix of sub-inputs affect the efficiency
Usually substituting a low-cost input with a low-cost input leads to a favorable variance
Yield variance
How did the quantity of the total amount of input used (keeping the mix of sub-inputs constsnt) affect the efficiency
Using less total inputs than budgeted leads to a favorable variance
Developing a flexible budget
Calculate budgeted inputs allower per unit (allocation base)
Calculate budgeted overhead rate
Spending variance
(Actual overhead rate - budgeted overhead rate) * actual allocatino units (e.g. labor hours)
Efficiency variance
(actual allocation units - Budgeted allocation units for actual output) * budgeted overhead rate
There is no flexing of fixed overhead costs
There is no sales volume variance of fixed overhead costs
(budgeted fixed costs are unaffected by volume changes)
There is no efficiency variance
(A manager cannot be more or less efficient in dealing with a given amount of fixed costs)
On level 3, spending variance takes over the flexible budget variance
Production volume variance (level 3)
Under absoprtion costing, fixed overhead is allocated to products during the year
Allocation rate calculated at start of the period based on
1) budgeted fixed costs
2) Budgeted volume
sales mix variance
Focuses on the difference between budgeted and actual mix of products sold
Imagine composite product unit: hypothetical product according to the mix of products
sales- quantity variance
Focuses on the differences between budgeted and actual goods sold for each product type in the sales mix
Market share variance
Change of market share responsible for sales change (share of the pie)
Focus on difference between actual and budgeted market share
market size variance
Change of market siize responsible for sales change (size of the pie)
Focuses on difference between actual and budgeted market size
Why analyse variances
To learn about operations and promote organizational learning
Use the knowledge to improve or emphasize learning
E.g. improve delivery process or material quality to enhance efficiency
Learn about managers decisons and capabilities, evalueate performance and design compensation
-keep in mind: controllability, dependencies, non financial measures
Which variances to focus on
Not all variances are investigated
Management by exception
-Rules of thumb: company- and case specific
e.g. investigate all variances > 5000 or 25 percent of budgeted costs
Four types of responsibility centers
cost - accountable for costs only
Revenue - accountable for revenues only
Profit - Accoutable for revenues only
investment - accountable for
investments, revenue, and costs
Budgets coupled with responsibility centers provide a framework of reference for performance evaluation and feedback (based on variance analysis)
flexible budget
A budget that adjusts according to changes in the number of units
sales volume variance
Flexible budget amount - static budget amount
Flexible budget variance
Actual result - flexible budget amount
Static budget variance
Actual result - budgeted result
Price variance
How do prices of inputs deviate from expectation
Efficiency variance
How much input should have been used for the actual output compared to how much was actually used?
Price variance formula
(actual input price - budgeted input price) * actual quantity of input
Efficiency variance formula
(actual quantity of input - budgeted quantity of input for actual output) * Budgeted input price
Flexible budget variance formula
Budgeted input cost adjusted for actual output - actual input costs
Mix variance
How did the mix of sub-inputs affect the efficiency
Usually substituting a low-cost input with a low-cost input leads to a favorable variance
Yield variance
How did the quantity of the total amount of input used (keeping the mix of sub-inputs constant) affect the efficiency?
Using less total inputs than budgeted leads to a favorable variance
Budgeted inputs allowed per unit (allocation base) formula
E.g. budgeted direct labor hours / budgeted number of units
Budgeted overhead rate
budgeted manufacturing overhead / budgeted Direct labor hours
Spending variance formula (flexible budget)
(Actual overhead rate - budgeted overhead rate) * actual allocation units
Efficiency variance formula (flexible budget)
(Actual allocation units - budgeted allocation units for actual output) * Budgeted overhead rate
Fixed overhead variances
there is no flexing of fixed overhead costs
Product volume variance
Under absorption costing, fixed overhead is allocated to products during the year
Allocation rate calculated at start of the period based on:
1) Budgeted fixed costs
2) Budgeted volume (if missed, costs can be over-/ under-allocated (cf. previous seasons)
Direct labor hours (flexible budget)
Actual units * budgeted inputs per unit (allocation base)
Var. manufacturing overhead formula
Direct labor hours (of the flexible budget) * Budgeted overhead rate
