Acct+315+Chap+7+Flex+Budget+DC+_6

Acct+315+Chap+7+Flex+Budget+DC+_6 - Budgeting and Variances...

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Budgeting and Variances Uses of budgets Production variances
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Agenda Discussion of budgeting Discussion of variances Materials Labor Overhead Demonstration problems Thursday’s class Group work
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Master Budget Budget = quantitative expression of a firm’s strategic plan of action Master budget = prepared before the accounting period begins Also static budget Standard costs
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Preparing the budget Project sales Plan production activity level Sales prediction Current finished goods inventory Desired ending finished goods inventory Plan purchases, employment Estimate fixed costs Prepare estimated income statements and balance sheets
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Uses of budgets Planning Operational plans (short-term) Capital budgets (long-term) Company strategy Performance evaluation Variances Responsibility centers Control
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Behavioral aspects of budgeting: Participative budgeting Better information Better cooperation Budgetary slack Dysfunctional responses Compulsion to spend all discretionary funds Short-run emphasis on budget only Questionable actions designed only to balance the budget
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Flexible budget: Flexible budget = the master budget you would have prepared if you had known before the accounting period started how much you would actually produce during the period. Flexible budget = “standard cost allowed for good output achieved”
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Flexible budgets and performance evaluation: A c tu a l A c ti v it y M as te r Bu dg e t AP in pu t x AQ ou tp u t BP in pu t x BQ ou tp u t F l e x i b l e B u d g e t B P i n p u t x A Q o u t p u t "f lex ib le bu dg e t va ri an ce " A lso ca lle d p ro du c tio n va ri an ce "a c tiv ity va ri an ce "
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Variances “unfavorable variance” = NI is reduced from the budgeted expectation “favorable variance” = NI is increased from budgeted expectation Note: Do not interpret directly as “bad” or “good” behavior on the part of management.
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Variances Act ual: Act ual Cos ts, Act ual Produ ction Act ivity , Act ual Input Usag e F lexible Bud get: Bud geted Cos ts, Actual Produ ction Act ivity , Bud geted Input Usage M aster Bud get: Bud geted Cos ts, Bud geted Produ ction Act ivity , Bud geted Input Usag e S tandard Input: Bud geted Cos ts Act ual Produc tion Act ivity , Act ual Input Usag e P ri ce V a ri an ce E ff ic ie nc y V a ri an ce A c ti v it y V a ri an ce
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Variable cost variances Direct materials price variance: usage price variance purchase price variance (actual price - std. price) x actual usage
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Acct+315+Chap+7+Flex+Budget+DC+_6 - Budgeting and Variances...

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