CHAPTER%207 - CHAPTER 7 FLEXIBLE BUDGETS, DIRECT-COST...

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Unformatted text preview: CHAPTER 7 FLEXIBLE BUDGETS, DIRECT-COST VARIANCES, AND MANAGEMENT CONTROL 7-1 Management by exception is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected. Variance analysis helps managers identify areas not operating as expected. The larger the variance, the more likely an area is not operating as expected. 7.3 A favorable variance denoted Fis a variance that has the effect of increasing operating income relative to the budgeted amount. An unfavorable variance denoted Uis a variance that has the effect of decreasing operating income relative to the budgeted amount. 7.4 The key difference is the output level used to set the budget. A static budget is based on the level of output planned at the start of the budget period . A flexible budget is developed using budgeted revenues or cost amounts based on the actual output level in the budget period. The actual level of output is not known until the end of the budget period . 7-6 The steps in developing a flexible budget are: Step 1: Identify the actual quantity of output. Step 2: Calculate the flexible budget for revenues based on budgeted selling price and actual quantity of output. Step 3: Calculate the flexible budget for costs based on budgeted variable cost per output unit, actual quantity of output, and budgeted fixed costs. 7-7 Four reasons for using standard costs are: (i) cost management, (ii) pricing decisions, (iii) budgetary planning and control, and (iv) financial statement preparation. 7-9 Possible causes of a favorable direct materials price variance are: purchasing officer negotiated more skillfully than was planned in the budget, purchasing manager bought in larger lot sizes than budgeted, thus obtaining quantity discounts, materials prices decreased unexpectedly due to, say, industry oversupply, budgeted purchase prices were set without careful analysis of the market, and purchasing manager received unfavorable terms on nonpurchase price factors (such as lower quality materials). 7-11 Variance analysis, by providing information about actual performance relative to standards, can form the basis of continuous operational improvement. The underlying causes of unfavorable variances are identified, and corrective action taken where possible. Favorable variances can also provide information if the organization can identify why a favorable variance occurred. Steps can often be taken to replicate those conditions more often. As the easier changes are made, and perhaps some standards tightened, the harder issues will be revealed for the organization to act onthis is continuous improvement....
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CHAPTER%207 - CHAPTER 7 FLEXIBLE BUDGETS, DIRECT-COST...

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