Module 6 - What if Analysis Flashcards
what provides basis for what-if-analysis?
Structure and information required to prepare the master budget
2 what-if analyses
1) Evaluating decision-making alternatives
2) Sensitivity analysis
define what if analysis
A process of exploring the effects of changes in estimates on predictions in a financial model
define sensitivity analysis
The process of selectively varying a plan or budget’s key estimates for the purpose of identifying over what range a decision option is preferred
what is variance analysis
Comparison of planned (or budgeted) results with actual results
define variance?
difference between planned and actual results
what investigations can we do with variance analysis to determine 2 things
1) What caused the variance
2) What should be done to correct that variance
budgeting/planned costs can come from 3 sources:
1) Standards established by industrial engineers
2) Previous period’s performance
3) Benchmark - best in class results achieved by a competitor
what are financial numbers for flexible resources the product of
the product of a price and quantity component
formula for budgeted amount
Budgeted amount = standard price per unit * budgeted quantity
formula for actual amount
Actual amount = actual price per unit * actual quantity
Variance analysis explains the difference between planned and actual costs by evaluating: (2)
1) Differences between planned and actual prices
2) Differences between planned and actual quantities
why do managers focus separately on price and quantities?
in most organizations:
1) One department or division is responsible for the acquisition of a resource and determining the actual price.
2) A different department uses the resource and determines the quantity.
what is a variance in org?
A variance is a signal that is part of a control system for monitoring results.
what can managers do if specific actions they took helped lower actual costs?
they can obtain further cost savings by repeating those actions on similar jobs in the future
what can managers do if factors caused actual costs to be higher?
actions may be taken to prevent those factors from recurring in the future
what can managers do if cost changes are likely to be permanent?
cost information can be updated for future jobs
define master budget
A budget, typically prepared on a yearly basis, that includes operating budgets and financial budgets that identify the expected financial consequences of the activities reflected in the operating budgets
what is planned budget also called?
static budget
what is the first level variance?
static budget variance
formula for static budget variance
actual - static/master/planned/budgeted budget/cost item
when are static budget variance favourable?
if the actual costs are less than estimated static budget costs. (variance is negative)
when are static budget variance U
when actual costs exceed estimated static budget costs. (variance is positive)
what does flexible budget adjust?
adjusts the quantity forecast in the static budget for the difference between planned volume and actual volume
what does flexible budget reflect?
Reflects a cost budget or forecast based on the level of volume that is actually achieved.
how do we get flexible budget
a copy-and-paste of the standard budget, but flexed at the actual level of sales. The flexible budget presents the results that the company should have had with the actual sales units if they had kept everything else (selling price, costs) at the standard level.
what are the second level variances?
planning variance and flexible budget variance
what is planning variance also called
sales volume variance
planning variance effect
volume effect
planning variance formula
Flexible budget - static budget
what does planning variance reflect
Reflect the difference between planned output and actual output
why does planned variance arise?
because the planned volume of activity was not realized
flexible budget variance effect
standard effect
flexible budget variance formula
Actual - flexible budget
how do second and first level variance relate?
Second level variance sum to first level variance
formula for planning variance for single product org
(actual total sales volume - standard total sales volume) * standard unit CM
3rd level variances for flexible budget explained
DM and DL flexible budget variances can be decomposed into: quantity/efficiency variances and price/rate variances
explain quantity/efficiency variance
the difference between the planned and the actual use rates per unit of output
explain cost/price/rate variance
the difference between the planned and the actual price or cost per unit of the various cost items
6 3rd level variances for flexible budget
1) selling price variance
2) DM variance
3) DL variance
4) variable overhead variance
5) fixed overhead variance
6) fixed selling and admin variance
formula for selling price variance
(actual selling price - standard selling price) * actual sales volume
2 DM variance
price and quantity variance
DM price variance formula
(actual DM price - standard DM price) * actual quantity of materials used (actual # items/unit * Actual sales volume)
DM quantity variance formula
(actual quantity of materials used (actual # items/unit * Actual sales volume) - standard quantity of materials allowed (standard # items/unit * actual sales volume) * standard price of materials
2 DL variance
rate and efficiency variance
DL rate variance formula
(actual rate - standard rate) * actual # DL hours (actual hours/unit * actual sales volume)
DL efficiency variance formula
(actual cost driver volume used (actual volume/unit * actual sales volume) - standard cost driver volume allowed (standard volume/unit * actual sales volume)) * standard rate
what is the fixed overhead variance?
spending variance
formula for spending variance
actual fixed cost - standard fixed cost
why do we monitor fixed variances?
because spending on fixed costs can fluctuate from period to period
what is the fixed selling and admin variance?
spending variance
simple way to find planning variance?
flexible budget CM - static budget CM
list the 2 3rd level variances for planning variances
sales mix variance, sales quantity variance
what are the 3rd level variances for planning variances computed for?
computed for each product
what does sales mix variance measure?
Measures the effect of the difference in sales mix between the flexible budget and static budget on contribution margin
formula for sales mix variance
(Actual weight product i - standard weight product i) * actual total sales volume * standard unit contribution margin of product i
what does sales quantity variance measure?
Measures the effect of the quantity sales differences between the flexible budget and the static budget on contribution margin
formula for sales quantity variance
(actual total sales volume - standard total sales volume) * standard weight product i * standard unit contribution product i
2 4th level planning variances under sales quantity variance
market size variance, market share variance
what does market size variance measure
measures the effect, given the company’s planned market share, on contribution margin as planned and actual industry sales diverge.
formula for market size variance
(actual market size - standard market size) * standard market share * WACM
what does market share variance
measures the effect on contribution margin as the company’s market share changes, at the level of actual total industry sales.
formula for market share variance
(Actual market share - standard market share) * actual market size * WACM
