Copyright © 2003 Pearson Education Canada Inc. Slide 7-76 Chapter 7 Flexible Budgets, Variances and Management Control: I

Copyright © 2003 Pearson Education Canada Inc. Slide 7-1

Chapter 7

Flexible Budgets, Variances and Management Control: I


Static and Flexible Budgets

Static budget• a budget based on a single level of output

Flexible budget• a budget which is adjusted for the actual level of

output, revenue, or cost driver

Standard cost• a carefully predetermined amount representing what

management thinks a cost should be

ExamplesStandard quantity of materials = 2 kg. per unitStandard cost of materials = $8 per kg.Standard cost of materials = $16 per unit

Page 236


• Variances represent the difference between the cost that was incurred and the budgeted cost

• Actual cost > Budgeted cost = Unfavourable variance• Budgeted cost > Actual cost = Favourable variance

Variances

StaticActual Variance

Budget

Volume 10,000 2,000 U12,000

Revenue $1,850,000 $310,000 U$2,160,000

VariableCosts 1,120,000 68,000 F

1,188,000Contribution

Margin 730,000 242,000 U972,000

Fixed costs 705,000 5,000 F 710,000

Operatingincome $25,000 $237,000 U

$262,000

Pages 236 - 238

Static budget variance• difference between

actual results achieved and theoriginal staticbudget


StaticActual

Budget

Volume 10,00012,000

Revenue $1,850,000$2,160,000

VariableCosts 1,120,000

1,188,000Contribution

Margin 730,000972,000

Fixed costs 705,000 710,000

Operatingincome $25,000

$262,000

Using A Flexible Budget

Pages 238 - 240

$75,000 U

Flexible budget variance

$162,000 U

Sales volume variance

$237,000 U

Total static budget variance

FlexibleBudget

10,000

$1,800,000

900,000

810,000

710,000

$100,000

SalesVolume

Variance

2,000 U

$360,000 U

198,000 F

162,000 U

$162,000 U

FlexibleBudget

Variances

0

$50,000 F

130,000 U

80,000 U 5,000 F

$75,000 U


Selling Price Variance

Variance analysis• used to evaluate performance• separate measures of effectiveness and efficiency

Selling price variance

=

= ($185 - $180) x 10,000 units

= $50,000 F

Pages 240 - 241

Actualselling price

Budgetedselling price

Actualunits sold

x-


Sales Volume Variance

Effectiveness• degree to which the organization’s goals were met• measured by the Sales volume variance

Sales volume variance

=

= (10,000 - 12,000) x $81

= $162,000 U

Pages 240 - 241

Actualunits sold

Budgetedunits sold

Budgeted contribution margin

per unitx-

Note: This variance can be read as the difference between the contribution margin in the flexible and static budgets


Price and Efficiency Variances

• Price variance is the difference between the actual price and the budgeted price multiplied by the actual quantity of inputs used

• Efficiency variance is the difference between the actual quantity of inputs used and the budgeted quantity of inputs that should have been used, multiplied by the budgeted price

Static Budget Variance

Flexible Budget Variance Sales Volume Variance

Price Variance Efficiency Variance

Pages 241 - 242


Price and Efficiency Variance - Materials

Actual Budget

Direct 22,200 sq metres 20,000 sq metresmaterials $31 per metre $30 per metre

Price variance = (Actual price - Budgeted price) x Actual quantity used= ($31 - $30) x 22,200 = $22,200 U

Efficiency variance= (Actual quantity used - Budgeted quantity used) x

Budgeted price= (22,200 - 20,000) x $30 = $66,000 U

Pages 243 - 247


Price and Efficiency Variance – Labour I

Actual Budget

Manufacturing 9,000 hours 8,000 hourslabour $22 per hour $20 per hour

Price (or rate) variance = (Actual price - Budgeted price) x Actual quantity used= ($22 - $20) x 9,000 = $18,000 U


Budgeted price= (9,000 - 8,000) x $20 = $20,000 U

Pages 243 - 247


Price and Efficiency Variance – Labour II

Actual Budget

Marketing 2,304 hours 2,500 hourslabour $25 per hour $24 per hour

Price (or rate) variance = (Actual price - Budgeted price) x Actual quantity used= ($25 - $24) x 2,304 = $2,304 U


Budgeted price= (2,304 - 2,500) x $25 = $4,704 F

Pages 243 - 247


Price and Efficiency Variances

Material

Pages 243 - 247

Flexible Budget Variance$88,200 U

Price Variance$22,200 U

Efficiency Variance$60,000 U

Manufacturing Labour

Flexible Budget Variance$38,000 U


Efficiency Variance$20,000 U


Price and Efficiency Variances (Continued)

Pages 243 - 247

Flexible Budget Variance$2,400 F


Efficiency Variance$4,704 F

MarketingLabour


Evaluating Performance

• Variances are used to evaluate performance

• Effectiveness – the degree to which organization’s predetermined goals were met

• Efficiency - how well inputs were used in relation to a given level of output

• Variances indicate that something was difference than expected

• What is critical is to understand why variances arise and use this knowledge to promote learning and continuous improvement

• Most companies investigate only significant variances

Pages 248 - 250


Continuous Improvement and Variances

• Using continuous improvement budgeted costs is another way to control variances

• Budgeted cost is successively reduced over succeeding time periods

• Signals importance of reducing costs

Pages 250 - 251

Prior Month’s Reduction in Revised

Month Budgeted Amount Budgeted Amount Budgeted Amount

April - - $60.00

May $60.00 $0.600 (1% x $60.00) 59.40

June 59.40 $0.594 (1% x $59.40) 58.81

July 58.81 $0.588 (1% x $58.81) 58.22


Benchmarking and Variance Analysis

• Can think of budgeted amounts as benchmarks (points of reference from which comparisons may be made)

• Benchmarking refers to the continual process of measuring products, services and activities against the best levels of performance

• May use internal or external benchmarks\

Key Questions to Ask• Why are the cost levels different between units?• How can best practices be transferred from more

efficient to less efficient units?

Pages 256 - 258

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Copyright © 2003 Pearson Education Canada Inc. Slide 7-76 Chapter 7 Flexible Budgets, Variances and Management Control: I