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Published byBlanche Butler Modified over 9 years ago
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Variances Short summary
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Static Budgets A static budget ( master budget) is prepared for only one level of a given type of activity. All actual results are compared with the original budgeted amounts, even if sales volume is more or less than originally planned.
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Master Budget Variance: Sales The variances of actual results from the master budget are called master (static) budget variances.
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Master Budget Variance: Expenses Actual expenses that are less than budgeted expenses result in favorable expense variances. Actual expenses that exceed budgeted expenses result in unfavorable expense variances.
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Flexible Budget A flexible budget (variable budget) is a budget that adjusts for changes in sales volume and other cost-driver activities.
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Flexible Budget Formulas To develop a flexible budget, managers determine revenue and cost behavior (within the relevant range) with respect to cost drivers.
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Evaluation of Financial Performance Units 7,000 9,000 2,000 U Sales$217,000$279,000$62,000 U Variable costs 152,600 196,200 43,600 F Contribution margin$ 64,400$ 82,800$18,400 U Fixed costs 70,000 70,000– Operating income$ (5,600)$ 12,800$18,400 U MasterbudgetFlexiblebudget for actual salesactivitySales-activityvariances Total master budget variances = $11,570 + $12,800 = $24,370
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Isolating the Causes of Variances Effectiveness is the degree to which a goal, objective, or target is met. Performance may be effective, efficient, both, or neither. Efficiency is the degree to which inputs are used in relation to a given level of outputs.
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Flexible-Budget Variances Total flexible-budget variance = Total actual results – Total flexible-budget planned results Flexible-budget variances Actualresults$(11,570)Flexiblebudget$(5,600) $5,970 Unfavorable
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Sales-Activity Variances Total sales-activity variance = Actual sales unit – Master budgeted sales units × Budgeted contribution margin per unit
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Sales price and Sales Volume Variances Sales prices fluctuations cause variance: The sales-price variances arises because a company increased or decreased its sales price when compared with the budgeted sales price. SPV = (Act. Sale Price – Exp. Sale Price) X Act. Sales Volume Volume fluctuations cause variance: The sales-volume variance, which arises from an increase or decrease in units sold. SVV = (Act. Sales Vol. – Bud. Sale Vol.) X Unit Contribution Margin
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Variances from Material and Labor Standards Flexible budget or total standard cost allowed Units of good output achieved Input allowed per unit of output Standard unit price of input × × = Standard Direct-Materials Cost Allowed:
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Price and Usage Variances (Actual quantity – Standard quantity) × Standard price (Actual price – Standard Price) × Actual quantity
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Variable-Overhead Efficiency Variance When actual cost-driver activity differs from the standard amount allowed for the actual output achieved, a variable-overhead efficiency variance will occur.
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Variable-Overhead Spending Variance This is the difference between the actual variable overhead and the amount of variable overhead budgeted for the actual level of cost-driver activity.
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AH × AR Spending variance = AH(AR - SVR) Efficiency variance = SVR(AH - SH) Spending Variance Efficiency Variance Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours AH × SVR SH × SVR Variable Overhead Variances
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Budget Variance Volume Variance Predetermined FOVH= Budgeted Fixed OVH/ normal activity level of cost driver Cost driver = units produced, direct labor hours, machine hours etc. cost driver × predet.overhead rate Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied Fixed Overhead Variances
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