Ch7: Flexible Budgets, Direct-Cost Variances, and Management Control

Selling-price variance

the flexible-budget variance for revenues. selling-price variance=(actual selling price - budgeted selling price)*actual units sold

Three main sources for obtaining budgeted input prices and budgeted input quantities.

1. Actual input data from past periods. 2. Data from other companies that have similar processes. 3. Standards developed.

Static Budget

Or master budget, is based on the level of output planned at the start of the budget period.

Management by exception

Practice of focusing management attention on areas that are not operating as expected and devoting less time to areas operating as expected.

Efficiency variance

Reflects the difference between an actual input quantity used and budgeted input quantitiy allowed for actual output, multiplied by budgeted price. Also called usage variance. Efficiency variance=(actual quantity of input used - budgeted quantity of input allowed for actual output)*budgeted price of input

Benchmarking

The continuous process of comparing the levels of performance in producing products and services and executing activities against the best levels of performance in competing companies or in companies having similar processes.

Price variance

The difference between actual price and budgeted price, multiplied by actual input quantity. Also called an input-price variance or rate variance. price variance=(actual price of input - budgeted price of input)*actual quantity of input

Flexible-budget variance

The difference between an actual result and the corresponding flexible-budget amount.

Static budget variance

The difference between the actual result and the corresponding budgeted amount in the static budget.

Sales-volume variance

The difference between the static-budget and the flexible-budget amounts.

Market-size variance

The difference in budgeted contribution margin at budgeted market share caused solely by actual market size in units being different from budgeted market size in units. market-size variance=(actual market size - budgeted market size)*budgeted market share*budgeted contribution margin per unit

Market-share variance

The difference in budgeted contribution margin for actual market size in units caused solely by actual market share being different from budgeted market share. Market-share variarance=actual market size in units*(actual market share - budgeted market share)*budgeted contribution margin per unit

Favorable variance

denoted F in this book, and has the effect, when considered in isolation, of increasing operating income relative to the budgeted amount.

Variance

A variance is the difference between actual results and expected performance. The expected performance is also called budgeted performance.

Subdivide the flexible-budget variance for direct-cost inputs into two more-detailed variances:

1. A price variance that reflects the difference between an actual input price and a budgeted input price. 2. An efficiency variance that reflects the difference between an actual input quantity and a budgeted input quantity.

Three steps to develop flexible budget:

1. Identify the actual quantity of output 2. Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output. 3. Calculate the flexible budget for costs based on budgeted variable cost per output unit, actual quantity of output, and budgeted fixed costs.

Standard price

A carefully determined price that a company expects to pay for a unit of input.

Standard input

A carefully determined quantity of input required for one unit of output.

Budgeted performance

A point of reference for making comparisons. Also called expected performance.

Flexible budget

Calculates budgets revenues and budgeted costs based on the actual output in the budget period. Prepared at the end of the period, after the actual output is known.

Unfavorable variance

denoted U in this book, and has the effect, when viewed in isolation, of decreasing operating income relative to the budgeted amount. Unfavorable variances are also called adverse variances in some countries.