ACCT 2122 Chapter 9

Unfavorable variance

Actual revenue (flexible) is less than budgeted revenue (planning).

Favorable variance

Actual revenue (flexible) is more than budgeted revenue (planning).

planning budget

A budget created at the beginning of the budgeting period that is valid only for the planned level of activity.

flexible budget

A report showing estimates of what revenues and costs should have been, given the actual level of activity for the period.

Variances are more accurate when using:

multiple cost drivers

Nonprofit organizations:

1.) usually have signif‌icant funding sources other than sales 2.) may have revenue sources that are fixed

When preparing a f‌lexible budget, the level of activity:

affects variable costs only

Because of the existence of fixed costs, net operating income does not ___

change in proportion to changes in the level of activity. > This is called the Leverage Effect >The percentage changes in net operating income are ordinarily larger than the percentage increases in activity.

because the cost formulas based on more than one cost driver are more accurate than the cost formulas based on just one cost driver, ___

the variances will also be more accurate

A static planning budget is suitable for ____ but is inappropriate for ___

> planning > evaluating how well costs are controlled

It is often easier to control ___

fixed costs than variable costs. > Ex. it would be fairly easy for you to change your insurance bill by adjusting the amount of insurance you carry. It would be much more difficult for you to significantly reduce your spending on hairstyling supplies—a variable cost that is a necessary part of serving customers.

The spending variance is labeled as favorable when the:

actual cost is less than what the cost should have been at the actual level of activity

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.

Unfavorable activity variances may not indicate bad performance because:

increased activity should result in higher variable costs.

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

revenue and spending

The revised flexible budget based on both client-visits and hours of operation can be used ___

exactly like we used the earlier flexible budget based on just client-visits to compute activity variances, revenue and spending variances, and a performance report

The difference between a revenue or cost item in the planning budget and the same item in the f‌lexible budget at the actual level of activity is a(n) ___ variance.

activity

A f‌lexible budget performance report combines the:

activity variances with the revenue and spending variances

unfavorable/favorable variances don't always indicate ___

bad/good performance > Ex. The activity variance for electricity is shown on the report as $10 U (unfavorable). Note that in this case, the label "unfavorable" may be a little misleading. The electricity cost should be $10 higher because business was up by 100 client-visits; therefore, it would be misleading to describe this variance in negative terms given that it was a necessary cost of serving more customers.

A cost center's performance report does not include:

1.) revenue 2.) net operating income

fixed costs are ___ in planning and flexible budgets

equal

True or false: Activity variances help managers understand why actual net income differs from what it should have been at the actual level of activity.

False > Revenue and spending variances help explain the difference.

Activity variance

The difference between a revenue or cost item in the flexible budget and the same item in the static planning budget. > 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.

Spending variance

The difference between the actual amount of the cost and how much the cost should have been, given the actual level of activity. > A favorable (unfavorable) spending variance occurs because the cost is lower (higher) than expected, given the actual level of activity for the period.

Revenue variance

The difference between the actual revenue for the period and how much the revenue should have been, given the actual level of activity. > A favorable (unfavorable) revenue variance occurs because the revenue is higher (lower) than expected, given the actual level of activity for the period.

One option to generate a favorable ___ variance for net operating income is to increase the number of clients.

activity

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 > If adjustments for the level of activity are not made, it is very difficult to interpret discrepancies between budgeted and actual costs.