Chapter 9
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 unfavourable.
Planning Budget
prepared before the period begins and is valid for only the planned level of activity
flexible budget is prepared by
using a static level of activity. A flexible budget takes into account what costs should have been at the actual level of activity.
Variance Analysis Cycle is used to...
evaluate and improve performance
F and U
favorable / unfavorable
The percentage changes in net operating income are ordinarily larger than the percentage increases in activity t/f
True (Leverage effect)
A revenue variance is
the difference between what revenue should have been at the actual level of activity and the actual revenue
Commission expense is budgeted to be $16,000 at a planned sales level of 4,000 units. If only 2,900 units are sold, how much commission expense will appear on the flexible budget, and is the activity variance favorable or unfavorable?
$11,600 and favorable. Flexible budget expense: $16,000 / 4,000 = $4 per unit x 2,900 units = $11,600. Since the flexible budget expense < planning budget expense, the variance is favorable.
Static Planning Budget
Is suitable for planning but is inappropriate for evaluating how well costs are controlled
Revenue and spending variances
Subtract flexible budget from actual results
Activity variance
Subtracting planning budget from flexible budget
Activity Variance
The variances on a flexible report that are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the period.
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
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
activity variance
When preparing a flexible budget, the level of activity
affects variable costs only
Activity variances
all of the variances on this report are solely due to the difference between the actual level of activity and the level of activity in the planning budget from the beginning of the period.
flexible budget
an estimate of what revenues and costs should have been, given the actual level of activity for the period
The variance analysis cycle
begins with the preparation of performance reports
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