Chapter 23 ACCT

Variance Relationships

First, the cost and efficiency variances add up to the flexible budget variance. Second, static budgets play no role in the cost and efficiency variances. The static budget is used only to compute the sales volume variance, the variance caused because the company sold a different quantity than it thought it would sell when it created the budget. It is never used to compute the flexible budget variance or the cost and efficiency variances for materials and labor.

Sales volume variance

The difference between a flexible-budget amount and the corresponding static-budget amount.

flexible budget variance

The difference between actual results and the expected results in the flexible budget for the actual units sold.

total overhead variance

is the difference between actual overhead cost and standard overhead allocated to production

fixed overhead volume variance

is the difference between the budgeted fixed overhead and the amount of fixed overhead allocated

Cost Variance (CV)

is the difference in costs of an input multiplied by the actual quantity used of the input. -measures how well the business keeps unit cost of material and labor inputs within standards.

Efficiency Variance

is the difference in the quantities multiplied by the standard cost per unit of the input. -measures how well the business uses its materials or human resources.

Standard

is the price, cost, or quantity that is expected under normal conditions

fixed overhead cost variance

measures the difference between actual fixed overhead and budgeted fixed overhead

Management by Expectations

occurs when managers concentrate on results that are outside the accepted parameters. - Managers focus on the exceptions. - Exceptions are either a percentage or dollar amount.

Master budget focuses on

planing step

Managers use budgets for

planning and controlling business activities

Flexible Budget

summarizes revenues and expenses for various levels of sales volume within a relevant range. - separate variable costs from fixed costs. - variable costs put the flex in the flexible budget

Controlling step involves

the decisions managers make during and after the budgeting period, based on the actual results.

static budget variance

the difference between actual results and the expected results in the static budget

Variance

the difference between an actual amount and the budgeted amount. - considered favorable if it increases operating income and unfavorable if it decreases operating income

variable overhead cost variance

(AC-SC) x AQ

Favorable or Unfavorable Variance

*Favorable (F)* if an actual amount increases operating income: - Actual revenue > Budgeted revenue - Actual expense < Budgeted expense *Unfavorable (U)* if an actual amount decreases operating income: - Actual revenue < Budgeted revenue - Actual expense > Budgeted expense

Standard Costing helps

-Prepare the master budget -Set target levels of performance for flexible budgets -Identify performance standards -Set sales prices of products and services -Decrease accounting costs

Benchmarking

A process of continuously measuring system results, comparing those results to optimal system performance (benchmark values), and identifying steps and procedures to improve system performance

Standard Cost System

An accounting system that uses standards for product costs- direct materials, direct labor, and manufacturing overhead.

Static Budget Variance Grand scheme

The flexible budget variance is the difference between the actual results and the flexible budget, whereas the sales volume variance is the difference between the flexible budget and the static budget. The combination of the flexible budget and sales volume variances is the total static budget variance.

static budget

a budget prepared for only one level of sales volume - a form of master budget - does not change after it is developed - underestimated both sales and total variable costs

Labor Standards

are established from analyzing the production process -the amount of time required to perform a job or part of a job

Sales and total variable costs differences are due to:

difference in prices or costs and/or there is a difference in volume

budget performance report

the report that summarizes actual results, budgeted amounts, and the differences for the units produced

Efficiency Standards

they are a measure of how much input should be put into the manufacturing process. - aka: quality or usage standards