Acct 2270- ch 9
What are the six parts of the variance analysis cycle
1. Prepare performance report 2. Analyze variances 3. Raise questions 4. Identify root causes 5. Take action 6. Conducting next period's Operations THEN REPEAT
Where are the two key things used in a flexible budget
1. The same cost formulas, from the planning budget, are used to estimate what the costs should have been for the actual activity level (same for revenue) 2. The actual volume is used
What is the difference between a flexible budget and a planning budget
A flexible budget shows what should have happened at the actual level of activity; a planning budget shows what should have happened at the budgeted level of activity
Net operating income does not change in proportion to changes in the level of activity. What does this cause
A leverage effect
What is management by exception
A management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further
What is a planning budget also called
A static budget
What is the equation to find activity variances
Activity variances = flexible budget - planning budget
What are the two types of variances
Activity variances and revenue/spending variances
What happens when a flexible budget is used in performance evaluation
Actual costs are compared to what the costs should have been for the actual level of activity during the period, rather than to the static planning budget
What is the column set up for the performance report combining activity and revenue/spending variances
Actual results, R/S variances, flexible budget, activity variances, planning budget
When is a flexible budget prepared
After the period was done
What is a flexible budget
An estimate of what revenues and costs should have been, given the actual level of activity for the period
Why don't you place much emphasis on any other single variance in the activity variance report, other than the variance in net operating income
Because NOI and volume are the main concerns
a percentage change in volume cannot be used to express the percentage change in the net operating income, the same percentages are not used.why
Because a fixed costs, they didn't change
Why would a favorable activity variance for net operating income occur
Because actually activity exceeded budgeted activity
If volume was more than planned why is it expected that expenses should be higher, for the activity variances
Because business increase
What does The activity variance for net operating income say
Because of the difference in the activity levels, the net operating income should have been $X higher or lower
Why can a fixed cost have a spending variance
Because the estimated amount in the flexible budget can differ from the actual amount of fixed costs incurred
Why would an unfavorable R &S variance occur for NOI
Because the profit was not as large as it should have been for the actual level of activity
How can the difficulty of accurately predicting future financial performance be readily understood
By reading the annual report of any publicly traded company
What could explain a favorable/unfavorable revenue variance
Change in selling price, different sales mix, change in the amount of discounts given, poor accounting control, etc.
What could be the reasons for the difference in revenue, when looking at actual activity versus the planning budget
Changes in Volume or sales price
What could explain a difference in net operating income between actual activity and the planning budget
Changes in Volume, higher prices, lower costs, etc.
What are some reasons why actual results may differ from expectations
Changes in supply, costs, qualitability; changes in market demand; Changes in laws or regulations; currency conversion fluctuations; and changes in the nature of the industry
What do cost and revenue formulas do
Estimate what the costs and revenue should be for a given level of activity
What is a static planning budget inappropriate for
Evaluating how well costs are controlled
What can A variance be
Favorable or unfavorable
What does management by exception to allow managers to do
Focus on the most important variances while bypassing trivial discrepancies between the budget and actual results; allows them to focus on the large issues and ignore the small
What do managers do when trying to find important variances
Focus on the size of the variance relative to the amount of spending AND the pattern of the variances (so as to find signals that something is wrong vs when something could be immediately attributable to random factors, and look at steadily mounting variances)
With R &S variances, what does the overall NOI variance represent
Given the actual level activity, NOI was $X higher/lower than it should have been
What can adjusted budgets help to do
Guide actual operations and influence the performance evaluations process
What does the flexible budget take into account
How changes in activity effect costs
What do activity variances answer/tell
How much of the discrepancy was due to volume ; shows what happened solely because the actual level of activity differed from what had been expected
What do the revenue and spending variance answer
How well did the organization control the costs, revenues, and profits
What is a revenue variance unfavorable
If average selling price is less than expected
When is a revenue variance favorable
If the average selling price is greater than expected
Why is a performance reports that combines activity and revenue/spending variances helpful
It brings information together in a way that is easy to interpret what happened during the period
What is done to each cost, for planning and flexible budgets
It cost formula is established
What idea does the variance analysis cycle use
Management by exception
What can a cost be
Mixed, fully fixed, or fully variable
Variances reported could be mostly unfavorable rather than favorable, even if net operating income increases. Why
Mostly because many expenses have variable aspects, so some costs will be higher when volume increases
What happens because of the existence of fixed costs when looking at activity variances
Net operating income does not change in proportion to changes in the level of activity
Are actual results determined by putting the actual level activity into the revenue and cost formulas
No
Are fixed costs affected by the level of activity
No
Do favorable variances always indicate a good performance
No
Do unfavorable variances always indicate bad performance
No
Should the variance analysis cycle be used to assign blame
No
What could explain a favorable/unfavorable spending variance
Paying more/less, using less/to much, change in technology, etc.
What is a static planning budget suitable for
Planning
What kind of budgets were the budgets from chapter 8
Planning budgets
What is a planning budget
Prepared before the period begins; valid only for the planned level of activity
What is the equation to find the revenue and spending variances
R &S variances = actual results - flexible budget
What do variances do
Raise questions
What is commonly found in the annual report of any publicly traded company
Reasons why actual results may differ from expectations
How do you get NOI
Revenue - expenses
What happens if actual activity exceeds the budgeted activity, when looking at the activity variances
Revenue increases and are favorable, costs increase and are unfavorable
In the planning budget, which term is used revenue or sales and why
Revenue, because some companies have sources of revenue other than sales, like donations
What can happen because the activity level of planned budgets versus actual activity varies
Revenues and costs will differ
How does a flexible budget work
That adjusts to show what the revenues and costs should be for the actual level of activity
What is common when looking at actual activities versus planned activities
The activity level, expenses, and revenue will be different
True or false: what actually happens usually difference from what was supposed to happen
True
True or false: with the planning budget you want find the major categories of costs
True
True or false: even with the change in volume, some costs do not change
True, fixed costs don't change
What do performance reports highlight
Variances
What is sometimes characteristic, when volume increases
Variances reported could be mostly unfavorable rather than favorable, even if net operating income increases
What are activity variances
Variances that are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the .; flexible - planning
What does the R &S variances look at
What actually happened versus what should have happened
What do the activity variances answer
What impact did the change in activity have on our revenues, costs, and profits
What does a flexible budget give you
What net operating income should have been
What are some common questions that variances raise
Why did the variance occur, why is the variance larger than it was previously, etc.
What do R &S variances help business understand
Why the actual net operating income differs from what should have happened, given the actual level of activity
How does the variance analysis cycle begin
With the accounting department making performance reports; every new cycle begins with the a performance report for the latest.
Are revenues and costs influenced by volume
Yes
Can a fixed cost have a spending variance
Yes
What happens with the planning budget
You set a single level of activity and use that level to compute the revenue and expenses
What should happen when actually activity is higher than expected
You should have higher variable cost
What should happen if actual activity is lower than expected
You should have lower variable costs
What are you doing when comparing the planing budget and the actual results
You're comparing actual cost at one level activity to budgeted costs at a different level of activity
True or false: if adjustments for the level of activity are not made, it is very difficult to interpret discrepancies between budgeted and actual costs
True
True or false: it would be misleading to describe an unfavorable cost (activity) variance in negative terms, given that it was a necessary cost of serving more customers
True
True or false: the percentage changes in net operating income are ordinarily larger than the percentage changes in activity
True
True or false: there is a performance report that combines activity and revenue/spending variances
True
What is a spending variance
The difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity
What is a revenue variance
The difference between the actual total revenue and what the total revenue should have been, given the actual level of activity for the period
What is one reason for the discrepancy between budgeted and actual profit
The fact that actual level of activity was different than expected
What happens because the costs change less than the percentage change in volume, under activity variances
The net operating income changes more than the percentage change in volume
What happens to the percentage change in volume and NOI because of fixed costs
The percentage change is greater under NOI than in volume
What is the most important activity variance
The variance for net operating income
What is the R &S variances, if actual cost is less than what costs should have been
The variance is favorable
What is the R &S variances, if actual revenue exceeds what revenue should have been
The variance is favorable
What is the R &S variances, if actual cost exceeds what cost should have been
The variance is unfavorable
What is the R &S variances, if actual revenue is less than what revenue should have been
The variance is unfavorable
Where the variances in a performance report combining activity and revenue/spending variances
The variances are between the amounts, not after them
What is the problem with variances comparing actual activity versus the planning budget
They compare revenues and costs at different levels of activity, the reports need to be more meaningful than this
Why do organizations use flexible budgets
To compare actual results to what should have occurred according to the budget
How do companies use the variance analysis cycle
To evaluate and improve performance
Why are significant variances investigated
To find the root cause, and either replicate it or eliminate it
True or false: a manager should not be penalized for spending 10% on variable expenses when unit sales increased by 10%
True
True or false: fixed costs should be the same for flexible and planning budget
True
True or false: if actual activity level differs from what was planned, it would be misleading to compare actual costs to the static, nonchanging, budget
True
