Acc Ch 9
What is management by exception?
management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further approach enables mgrs to focus on the most important variances while bypassing trivial discrepancies between the budget and actual results
Activity variance =
Flexible budget -static budget === activity variance
Common errors in preparing performance reports
1. assume that all costs are fixed 2. assume that all costs are variable (lead to inaccurate benchmarks)
Revenue variance =
Actual Revenue -Flex Budget rev
Spending variance=
Actual cost -flexible budget cost
Variance Analysis Cycle
Begin Prepare performance report Analyze variances Raise questions Identify root causes Take actions Conduct next period's operations
Revenue Variance
Difference between flexible budget revenue and actual revenue
How to prepare a budget with more than one cost driver
Ex: expenses= 100 + q1*50 + q2*60 ... More than one cost driver may be needed to adequately explain all of the costs in an organization. The cost formulas used to prepare a flexible budget can be adjusted to recognize multiple cost drivers.
Positive or negative activity variance
It is a favorable (unfavorable) variance
Activity variance
The differences between the (planning & flexible) budget amounts are called activity variances
Flexible budget
an estimate of what revenues and costs should have been, given the actual level of activity for the period. 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 Show costs that should have been incurred at the actual level of activity, enabling "apples to apples" cost comparisons helps managers control costs improves performance evaluation
Spending variance
difference between flexible budget cost and actual cost
Comparing static planning budgets with actual costs
is like comparing apples and oranges
Planning Budget
is prepared before the period begins and is only valid only for a single, planned level of activity. A static planning budget is suitable for planning but it inappropriate for evaluating how well costs are controlled Performance evaluation is difficult when actual activity differs from the planned level of activity
