Scribd
Upload
128 views21 pages

Flexible Budgets, Direct-Cost Variances, and Management Control

powerpoint cost accouting, decision Models

Uploaded by

Umar Farooq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
128 views21 pages

Flexible Budgets, Direct-Cost Variances, and Management Control

powerpoint cost accouting, decision Models

Uploaded by

Umar Farooq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 21

2009 Pearson Prentice Hall. All rights reserved.

Flexible Budgets,
Direct-Cost Variances,
and
Management Control
2009 Pearson Prentice Hall. All rights reserved.

Basic Concepts
Variance difference between an actual and an
expected (budgeted) amount
Management by Exception the practice of focusing
attention on areas not operating as expected
(budgeted)
Static (Master) Budget is based on the output
planned at the start of the budget period
2009 Pearson Prentice Hall. All rights reserved.

Basic Concepts
Static-Budget Variance (Level 0) the difference
between the actual result and the corresponding
static budget amount
Favorable Variance (F) has the effect of increasing
operating income relative to the budget amount
Unfavorable Variance (U) has the effect of
decreasing operating income relative to the budget
amount
2009 Pearson Prentice Hall. All rights reserved.

Variances
Variances may start out at the top with a Level 0
analysis.
This is the highest level of analysis, a super-macro view
of operating results.
The Level 0 analysis is nothing more than the
difference between actual and static-budget operating
income
2009 Pearson Prentice Hall. All rights reserved.

Variances
Further analysis decomposes (breaks down) the Level
0 analysis down into progressively smaller and smaller
components
Answers: How much were we off?
Levels 1, 2, and 3 examine the Level 0 variance into
progressively more-detailed levels of analysis
Answers: Where and why were we off?
2009 Pearson Prentice Hall. All rights reserved.

Level 1 Analysis, Illustrated
2009 Pearson Prentice Hall. All rights reserved.

Evaluation
Level 0 tells the user very little other than how much
Contribution Margin was off from budget.
Level 0 answers the question: How much were we off in
total?
Level 1 gives the user a little more information: it
shows which line-items led to the total Level 0
variance.
Level 1 answers the question: Where were we off?
2009 Pearson Prentice Hall. All rights reserved.

Flexible Budget
Flexible Budget shifts budgeted revenues and costs
up and down based actual operating results (activities)
Represents a blending of actual activities and
budgeted dollar amounts
Will allow for preparation of Level 2 and 3 variances
Answers the question: Why were we off?
2009 Pearson Prentice Hall. All rights reserved.

Level 2 Analysis, Illustrated
2009 Pearson Prentice Hall. All rights reserved.

Level 3 Analysis, Illustrated
2009 Pearson Prentice Hall. All rights reserved.

Level 3 Variances
All Product Costs can have Level 3 Variances. Direct
Materials and Direct Labor will be handled next.
Overhead Variances are discussed in detail in a later
chapter
Both Direct Materials and Direct Labor have both
Price and Efficiency Variances, and their formulae are
the same
2009 Pearson Prentice Hall. All rights reserved.

Variance Summary
(c) 2009 Pearson Prentice Hall. All rights reserved.

Level 3 Variances
Price Variance formula:



Efficiency Variance formula:
Price Actual Price Budgeted Price Actual Quantity
Variance Of Input Of Input Of Input
X =
{ - }
Efficiency Actual Quantity Budgeted Quantity of Input Budgeted Price
Variance Of Input Used Allowed for Actual Output Of Input
X
=
{ - }
2009 Pearson Prentice Hall. All rights reserved.

Variances & Journal Entries
Each variance may be journalized
Each variance has its own account
Favorable variances are credits; Unfavorable variances
are debits
Variance accounts are generally closed into Cost of
Goods Sold at the end of the period, if immaterial
2009 Pearson Prentice Hall. All rights reserved.

Standard Costing
Budgeted amounts and rates are actually booked into
the accounting system
These budgeted amounts contrast with actual activity
and give rise to Variance Accounts.
2009 Pearson Prentice Hall. All rights reserved.

Standard Costing
Reasons for implementation:
Improved software systems
Wide usefulness of variance information
2009 Pearson Prentice Hall. All rights reserved.

Management Uses of Variances
To understand underlying causes of variances.
Recognition of inter-relatedness of variances
Performance Measurement
Managers ability to be Effective
Managers ability to be Efficient
2009 Pearson Prentice Hall. All rights reserved.

Activity-Based Costing and Variances
ABC easily lends its to budgeting and variance
analysis.
Budgeting is not conducted on the departmental-wide
basis (or other macro approaches)
Instead, budgets are built from the bottom-up with
activities serving as the building blocks of the process
2009 Pearson Prentice Hall. All rights reserved.

Benchmarking and Variances
Benchmarking is the continuous process of comparing
the levels of performance in producing products &
services against the best levels of performance in
competing companies
Variances can be extended to include comparison to
other entities
2009 Pearson Prentice Hall. All rights reserved.

Benchmarking Example: Airlines
2009 Pearson Prentice Hall. All rights reserved.

You might also like