Chapter 8: Flexible Budgets and Standard Costs

favorable variance

difference in actual revenues or expenses from the budgeted amount that contributes to a higher income

unfavorable variance

difference in revenues or costs, when the actual amount is compared to the budgeted amount, that contributes to a lower income

budget report

report comparing actual results to planned objectives; sometimes used as a progress report

fixed budget performance report

report that compares actual revenues and costs with fixed budgeted amounts and identifies the differences as favorable or unfavorable variances

flexible budget performance report

report that compares actual revenues and costs with fixed budgeted amounts and identifies the differences as favorable or unfavorable variances

variance

a difference between an actual amount and a budgeted amount

standard costs

costs that should be incurred under normal conditions to produce a product or component or to perform a service

cost variance

difference between the actual incurred cost and the standard cost

spending variance

difference between the actual price of an item and its standard price

efficiency variance

difference between the actual quantity of an input and the standard quantity of that input

International Integrated Reporting Council

a global coalition that is establishing integrated reporting guidelines

integrated reporting

a short report that shows how an organization's strategy, governance, and performance relate to value creation

overhead cost variance

difference between the total overhead cost applied to products and the total overhead cost actually incurred

volume variance

difference between two dollar amounts of fixed overhead cost; one amount is the total budgeted overhead cost, and the other is the overhead cost allocated to products using the predetermined fixed overhead rate

controllable variance

actual total overhead incurred minus budgeted total overhead; equals the sum of both overhead spending variances (variable and fixed) and the variable overhead efficiency variance

quantity variance

difference between actual and budgeted revenue or cost caused by the difference between the actual number of units and the budgeted number of units

price variance

difference between actual and budgeted revenue or cost caused by the difference between the actual price per unit and the budgeted price per unit

standard costing income statement

income statement that reports sales and cost of goods sold at their standard amounts, and then lists the individual sales and cost variances to compute gross profit at actual cost

management by exception

management process to focus on significant variances and give less attention to areas where performance is close to the standard

fixed budget

planning budget based on a single predicted amount of volume; unsuitable for evaluations if the actual volume differs from predicted volume; also called a static budget

flexible budget

planning budget based on several predicted amounts of sales or other activity measure; also called a variable budget

benchmarking

practice of comparing and analyzing company financial performance or position with other companies or standards

variance analysis

process of examining differences between actual and budgeted revenues or costs and describing. them in terms of price and quantity differences