Accounting Chapter 9: Flexible Budgets and performance Analysis

Revenue and spending variance equation

actual results- flexible budget

Management by exception

a management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further. -this approach enables managers to focus on the most important variances while bypassing trivial discrepancies between the budget and actual results

The variance analysis cycle...

begins with the preparation of performance reports

A favorable activity variance may not indicate good performance because a favorable activity variance....

for a variable cost will occur simply because the actual level of activity is less than the budgeted level of activity

Favorable Variance

if actual revenue exceeds what the revenue should have been

unfavorable variance

if the average selling price is less than expected

variances are more accurate when using..

multiple cost drivers

when comparing the static planning budget to actual activity, a problem that arises when actual activity is higher than budgeted activity is that...

net income is higher than expected but all or most expense variances are unfavorable

to understand why actual net operating income differs from what it should have been at the actual level of activity, which variances should be analyzed

revenue and spending

Spending Variance

the difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity

variance analysis

companies use the variance analysis cycle to evaluate and improve performance

activity variance equation

flexible budget-planning budget

Planning Budget

prepared before the period begins and is valid for only the planned level of activity

Activity Variance

the difference between a revenue or cost item in the flexible budget and the same item in the static planning budget. An activity variance is due solely to the difference between the actual level of activity used in the flexible budget and the level of activity assumed in the planning budget

Revenue Variance

the difference between the actual total revenue and what the total revenue should have been, given the actual level of activity for the period.

A cost center's performance report does not include..

-net operating income -revenue

options to generate favorable revenue and spending variances include...

-reducing the prices of inputs -protecting the selling price -increasing operating efficiency

flexible budget

-take into account how changes of activity affect costs -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 peformance 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

static planning budget

suitable for planning but is inappropriate for evaluating how well costs are controlled -an unchanged planning budget

the percentage change in net income in the flexible budget is greater than the percentage change in activity is due to

fixed costs

nonprofit organizations

-have significant funding sources besides sales -may have revenue sources that are fixed