Acc Ch 9

What is management by exception?

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

Activity variance =

Flexible budget -static budget === activity variance

Common errors in preparing performance reports

1. assume that all costs are fixed 2. assume that all costs are variable (lead to inaccurate benchmarks)

Revenue variance =

Actual Revenue -Flex Budget rev

Spending variance=

Actual cost -flexible budget cost

Variance Analysis Cycle

Begin Prepare performance report Analyze variances Raise questions Identify root causes Take actions Conduct next period's operations

Revenue Variance

Difference between flexible budget revenue and actual revenue

How to prepare a budget with more than one cost driver

Ex: expenses= 100 + q1*50 + q2*60 ... More than one cost driver may be needed toadequately explain all ofthe costs in an organization. The cost formulas usedto prepare a flexiblebudget can be adjustedto recognize multiplecost drivers.

Positive or negative activity variance

It is a favorable (unfavorable) variance

Activity variance

The differences between the (planning & flexible) budget amounts are called activity variances

Flexible budget

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 performance 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 Show costs that should have beenincurred at the actual level ofactivity, enabling "apples to apples"cost comparisons helps managers control costs improves performance evaluation

Spending variance

difference between flexible budget cost and actual cost

Comparingstatic planning budgets with actual costs

is like comparingapples and oranges

Planning Budget

is prepared before the period begins and is only valid only for a single, planned level of activity. A static planning budget is suitable for planning but it inappropriate for evaluating how well costs are controlled Performance evaluation is difficult when actual activity differs from the planned level of activity