# Ch8 - CHAPTER 8 COVERAGE OF LEARNING OBJECTIVES LEARNING...

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CHAPTER 8 COVERAGE OF LEARNING OBJECTIVES LEARNING OBJECTIVE FUNDA- MENTAL ASSIGN- MENT MATERIAL CRITICAL THINKING EXERCISES AND EXERCISES PROBLEMS CASES, EXCEL, COLLAB., & INTERNET EXERCISES LO1: Distinguish between flexible budgets and static budgets. A1 LO2: Use flexible-budget formulas to construct a flexible budget based on the volume of sales. A1, 24, 25, 26 27 43, 49, 50 52, 53, 55, 57, 58 LO3: Prepare an activity- based flexible budget. 43 54 LO4: Explain the performance evaluation relationship between static budgets and
flexible budgets. LO5: Compute activity variances and flexible-budget variances.
LO6: Compute and interpret price and quantity variances for inputs based on cost-driver activity.
LO7: Compute variable overhead spending and efficiency variances.
LO8: Compute the fixed overhead spending variance. B3
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CHAPTER 8 Flexible Budgets and Variance Analysis 8-A1 (30-45 min.) Amounts are in thousands. 1. Flexible Budget Amounts Revenue \$7,600 _ \$8,000 \$8,400 Fuel \$ 152 \$ 160 \$ 168 Repairs and maintenance 76 80 84 Supplies and miscellaneous 760 800 840 Variable payroll 5,092 _ 5,360 5,628 Total variable costs \$6,080 _ \$6,400 _ \$6,720 Supervision \$ 180 \$ 180 \$ 180 Rent 160 160 160 Depreciation480 480 480 Other fixed costs 160 _ 160 160 Total fixed costs\$ 980 _ \$ 980 _ \$ 980 Total costs \$7,060 _ \$7,380 _ \$7,700 Operating income \$ 540 _ \$ 620 _ \$ 700 2. Cost = \$980,000 per quarter plus .80 of revenue = \$980,000 + .80 (Revenue) 3. Variances are defined as deviations of actual results from plans. The total variances in the problem can be subdivided to provide answers to two broad questions: (a) What portion is attributable to not attaining a predetermined level of volume or activity? When volume is measured in terms of sales, this variance is called the sales-activity variance . 2
(b) What portion is attributable to nonvolume effects? This variance is often called the flexible-budget variance , which is composed of price and quantity variances (where quantity variances are often called usage or efficiency variances). The existing performance report, which is based solely on a static budget, cannot answer these questions clearly. It answers (a) partially, because it compares the revenue achieved with the original targeted revenue. But the report fails to answer (b). A more complete analysis follows: Summary of Performance (in thousands) (1) (2) (3) (4) (5) Actual =(1)-(3) Flexible =(3)-(5) Results Budget at Actual Flexible- for Actual Sales Activity Budget Sales Activity Static Level Variances Activity Variances Budget Net revenue \$7,600 \$ - \$7,600 \$400 U \$8,000 Total variable costs 6,230 150U 6,080 320 F 6,400 Contribution margin\$1,370 \$150U \$1,520 \$ 80U \$1,600 Fixed costs 981 1U 980 - _ 980 Operating income \$ 389 \$151U \$ 540 \$ 80 U \$ 620 U = Unfavorable Column (4) focuses on the effects of sales volume. It shows that a \$400,000 drop in sales activity is expected to cause a \$80,000 decrease in contribution margin and hence a \$80,000 drop in operating income. Column (2) generally focuses on efficiency. Without a flexible budget, operating inefficiencies cannot be isolated from the 3
effects of changes in sales activity. Cost control performance may be reported in more detail, where the focus is on efficiency (in thousands): 4