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

This preview shows page 1 - 5 out of 71 pages.

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
1
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

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture