Flexible Budgeting Topic 9-2 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 9-3 Basic Concepts • 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 Static Budgets and Performance Reports Static budgets are prepared for a single, planned level of activity Performance evaluation is difficult when actual activity differs from the planned level of activity Hmm! Comparing static budgets with actual costs is like comparing apples and oranges 9-4 9-5 Characteristics of Flexible Budgets May be prepared for any activity level in the relevant range Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons Help managers control costs Improve performance evaluation 9-6 Activity variances, revenue variances & spending variances 9-7 Variance Analysis Standard Cost Variances Price Variance The difference between the actual price and the standard price Quantity Variance (Efficiency variance) The difference between the actual quantity and the standard quantity 9-8 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity Standard Quantity allowed × × Standard Price Standard Price Price Variance Quantity Variance Standard price is the amount that should have been paid for the resources acquired 9-9 A General Model for Variance Analysis Actual Quantity × Actual Price Actual Quantity Standard Quantity allowed × × Standard Price Standard Price Price Variance Quantity Variance Standard quantity allowed is the quantity allowed for the actual units produced Standard quantity per unit times the actual units produced 9-10 Material Variances Actual Quantity × Actual Price Actual Quantity Standard Quantity allowed × × Standard Price Standard Price 1,700 lbs × $3.90 per lb 1,700 lbs × $4.00 per lb 1,500 lbs × $4.00 per lb = $6,630 = $ 6,800 = $6,000 Materials price variance $170 favorable Materials quantity variance $800 unfavorable 9-11 Labor Variances Actual Hours × Actual Rate 1,550 hours × $12.20 per hour hour Actual Hours Standard Hours allowed × × Standard Rate Standard Rate 1,550 hours × $12.00 per hour = $18,910 Labor rate variance $310 unfavorable = $18,600 1,500 hours × $12.00 per = $18,000 Labor efficiency variance $600 unfavorable 9-12 Variable Manufacturing Overhead Variances Actual Hours × Actual Rate 1,550 hours × $3.30 per hour hour = $5,115 Actual Hours Standard Hours allowed × × Standard Rate Standard Rate 1,550 hours × $3.00 per hour = $4,650 Variable OH rate variance $465 unfavorable 1,500 hours × $3.00 per = $4,500 Variable OH efficiency variance $150 unfavorable 9-13 End of Topic ... Rate 1 ,55 0 hours × $3.30 per hour hour = $5, 1 15 Actual Hours Standard Hours allowed × × Standard Rate Standard Rate 1 ,55 0 hours × $3.00 per hour = $4, 650 Variable OH rate variance $4 65 unfavorable... $4, 650 Variable OH rate variance $4 65 unfavorable 1 ,50 0 hours × $3.00 per = $4 ,50 0 Variable OH efficiency variance $ 150 unfavorable 9-13 End of Topic ... 1 ,50 0 lbs × $4.00 per lb = $6,630 = $ 6,800 = $6,000 Materials price variance $170 favorable Materials quantity variance $800 unfavorable 9-11 Labor Variances Actual Hours × Actual Rate 1 ,55 0