Flexible Budget Variances

What can cause a production volume variance?

Actual sales volume that differs from budgeted sales volume.

What is a standard?

A carefully determine price, cost, or quantity used as a benchmark for judging performance.

What is a static budget?

A static budget is a budget developed at the beginning of some period of time based on input standards, price standards, and expected sales and production volume.

Are are unfavorable variances bad or all favorable variances good?

No. There are other examples in the book, but I have discussed the variable cost sales activity variance in class. Favorable variable cost means fewer units were sold, which can be bad.

What is a variance?

The difference between an actual result and expected performance.

What is a price variance?

The difference between the actual price of an input and the budgeted price of an input.

What is an efficiency variance?

The difference between the actual quantity of an input and the budgeted quantity of an input.

What is a flexible budget variance?

The flexible budget variance is the difference between the actual amount and the amount predicted on the flexible budget. For variable manufacturing costs, it can be further sub-divided into price and effeiciency variances. It can be combined with the sales activity variance to to determine the static budget variance.

Why is it useful to measures and evaluate variances?

They are helpful in explaining why actual income differs from budgeted income.

What does each variance tell management?

We have discussed in class.

Describe the flexible budget fixed overhead costs.

Conceptually, the flexible budget fixed costs are the total fixed costs we expect to incur for the year. They are not generally affected by changes in sales volume, so it should be the same as the static budget fixed costs.

Describe the flexible budget revenues.

Conceptually, the flexible budget revenues are the revenues we would expect to have given actual sales volume. Mathmatically, flexible budget revenue equals actual sales volume x budgeted price the difference between static budget revenue and flexible budget revenue is the sales activity variance for revenue.

Describe the flexible budget variable costs.

Conceptually, the flexible budget variable costs are the variable costs we expected to incur given actual sales volume. Mathmatically, flexible budget variable cost equals actual sales volume x budgted variable cost per unit. This is also equal to standard price x standard quantity allowed for actual sales volumes. The difference between static budget variable costs and flexible budget varible costs is the sales activitiy variance for variable costs. It is also called the sales volume variance for variable costs.

Describe the static budget fixed overhead costs.

Conceptually, the static budget fixed costs are the total fixed costs we expect to incur for the year. They are not generally affected by changes in sales volume.

Describe the static budget revenues.

Conceptually, the static budget revenues are the revenues we expected based on budgeted sales volume. Mathmatically, static budget revenue equals budgeted sales volume x budgted price

What cost variance analysis?

The comparison of actual input quantities and prices to expected input quantities and prices. In other words this is the process of determining price and efficiency variances.

What is the sales activity variance?

This is the variance that results from having a different sales volume than expected. It is determined by comparing the flexible budget to the static budget.

What makes a variance favorable or unfavorable?

A favorable variance has the effect of increasing income relative to the budgeted amount if nothing else changed.

What is a flexible budget?

A flexible budget is a budget developed using the same standards that were used to created the static budget but based on actual production. It is essentially the budget that would have been developed had the actual sales and production output been known.

What is management by exception?

A practice where managers focus their attention on understanding and addressing areas that are not operating as expected.

What profit variance analysis?

Analysis of the causes of variances that explain the difference between actual and budgeted profit.

What can cause a labor efficience variance?

Anything that causes more or less labor hours to be used per unit of output. Better machines, better quality material or better trained labor workers could all lead to a favorable labor efficiency variance.

What can cause a material efficience variance?

Anything that causes more or less material to be used per unit of output. Better machines, better quality material or better trained labor workers could all lead to a favorable material efficiency variance.

What can cause a variable overhead efficience variance?

Anything that causes more or less of the cost driver (allocation base) to be used per unit of output. If the cost driver is labor hours, better machines, better quality material or better trained labor workers could all lead to a favorable labor efficiency variance.

What can cause a fixed overhead spending variance?

Anything that causes the actual fixed overhead expensed to differ from the budgeted fixed overhead head.

What can cause a variable overhead spending variance?

Anything that causes the actual variable overhead head rate to differ from the budgeted variable overhead head. Ex. Different indirect labor cosst rates, different utility rates, different indirect labor rates.

What can cause a labor price variance?

Anything that causes the average labor wage to change. Ex. Raises, contract negotiations, new hires.

What can cause a material price variance?

Anything that causes the purchase price of the material to change. Ex. Purchase discount for bulk purchase, higher or lower quality material.

Describe actual fixed overhead costs.

Conceptually, actual fixed overhead costs are the total manufacturing related fixed costs incurred during the period. The difference between actual fixed overhead costs and the flexible budget fixed overhead costs (and the static budget fixed overhead costs) is the fixed overhead spending variance.

Describe the actual variable costs.

Conceptually, the actual costs are the actual variable costs incurred given actual sales volume. Mathmatically, actual variable cost equals actual sales volume x actual variable cost per unit.

Describe the actual revenues.

Conceptually, the actual revenues are the revenues earned for the year as a result of actual sales volume. Mathmatically, actual revenue equals actual sales volume x actual price. The difference between actual revenues and static budget revenues is the static budget variance. The difference between actual revenues and flexible budget revenues is called the sales price variance.

Describe the static budget variable costs.

Conceptually, the static budget variable costs are the variable costs we expect to incur based on budgeted sales volume. Mathmatically, static budget variable cost equals budgeted sales volume x budgeted variable cost per unit

What is a standard cost of direct labor per unit of output?

Expected direct labor cost of one unit of product as determined by the price and input standard. Cost standard = input standard x price standard

What is a standard cost of direct material per unit of output?

Expected direct material cost of one unit of product as determined by the price and input standard. Cost standard = input standard x price standard

What is a standard input price for direct labor?

Expected price paid for each hour of direct labor.

What is the standard input price for variable overhead (variable allocation rate)?

Expected price paid for each unit of allocation base.

What is a standard input price for direct material?

Expected price paid to purchase direct materials.

What is a standard quantity of input for variable overhead?

Expected quantity of allocation based used per unit of product.

What is a standard quantity of input for direct labor?

Expected quantity of direct labor used per unit of product.

What is a standard quantity of input for direct material?

Expected quantity of direct material used per unit of product.

What is the standard cost of variable overhead per unit of output?

Expected variable overhead cost of one unit of product as determined by the price and input standard. Cost standard = input standard x price standard

What is a static budget variance?

The static budget variance is the difference between the actual amount and the amount predicted on the static budget. The static budget variance can be separated into sales activity variance and the flexible budget variance. For variable manufacturing costs, is can be further divided into price variance, efficiency variance and sales activity variance.