Chapter 7 flexible budget and variances

Develops flexible budget in three steps:

1. Identify the Actual Quantity of Output. 2. Calculate the Flexible Budget for Revenues Based on the Budgeted Selling Price and Actual Quantity of Output. = (budgets price) * (actual output) 3. Add up Flexible Budget for Costs Based on the Budgeted Variable Cost per Output Unit, Actual Quantity of Output, and Budgeted Fixed Costs.

How can managers develop a flexible budget, and why is it useful to do so?

A flexible budget is adjusted (flexed) to recognize the actual output level of the budget period. Managers use a three-step procedure to develop a flexible budget. When all costs are either variable or fixed with respect to output, these three steps require only information about the budgeted selling price, budgeted variable cost per output unit, budgeted fixed costs, and actual quantity of output units. Flexible budgets help managers gain more insight into the causes of variances than is available from static budgets.

Management by exception is?

A practice whereby managers focus more closely on areas that are not operating as expected and less closely on areas that are.

What is a standard cost and what are its purposes?

A standard cost is a carefully determined cost used as a benchmark for judging performance. The purposes of a standard cost are to exclude past inefficiencies and to take into account changes expected to occur in the budget period.

What are static budgets and static-budget variances?

A static budget is based on the level of output planned at the start of the budget period. The static-budget variance is the difference between the actual result and the corresponding budgeted amount in the static budget.

static budget

Based on level of output planned at the start. Static because based on single(static) planned output.

What is benchmarking and why is it useful?

Benchmarking is the continuous process of comparing your firm's performance against the best levels of performance in competing companies or companies with similar processes. Benchmarking measures how well a company and its managers are doing in comparison to other organizations.

Variances

Differences between planned and actual income or expenses

Benefit of variance

Evaluate performance and motivates managers. Also shows if company needs to change strategy. Helps managers make informed decisions.

The unfavorable sales-volume variance in operating income arises because:

Failure of managers to execute the sales plans Weaker than anticipated overall demand Competitors taking away market share Unexpected changes in customer tastes and preferences Quality problems

Sales volume var a better measure than static-budget variances

Flexible-budget variances are a better measure of sales price and cost performance than static-budget variances because they compare actual revenues to budgeted revenues and actual costs to budgeted costs for the same output.

Management of exception

Managers focusing on area that are not operating as expected.

How do managers use variances?

Managers use variances for control, decision making, performance evaluation, organization learning, and continuous improvement. When using variances for these purposes, managers should consider several variances together rather than focusing only on an individual variance.

Budgeted performance

Point of reference for making comparison.

Why should a company calculate price and efficiency variables?

The computation of price and efficiency variances helps managers gain insight into two different—but not independent—aspects of performance. The price variance focuses on the difference between the actual input price and the budgeted input price. The efficiency variance focuses on the difference between the actual quantity of input and the budgeted quantity of input allowed for actual output.

How are flexible-budget and sales-volume variances calculated?

The static-budget variance can be subdivided into: a flexible-budget variance (the difference between the actual result and the corresponding flexible-budget amount) and a sales-volume variance (the difference between the flexible-budget amount and the corresponding static-budget amount).

Static budget variance

The variance between actual performance and static budget.

Flexible Budgets

calculates budgeted revenues and budgeted costs based on the actual output in the budget period.

additional benefits of variances

evaluating performance and to motivate managers. Sometimes suggest that the company should consider a change in strategy. also help managers make more informed predictions about the future and thereby improve the quality of the five-step decision-making process.

To gain further insight, a company will subdivide the flexible-budget variance for its direct-cost inputs into two more-detailed variances:

price variance that reflects the difference between an actual input price and a budgeted input price efficiency variance that reflects the difference between an actual input quantity and a budgeted input quantity

Variances brings together?

the planning and control functions of management and facilitate management by exception.