Week 6 Flexi budget and variances

# Week 6 Flexi budget and variances - Learning Objectives...

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Flexible Budget and Variance Analysis Accy211: Management Accounting II Autumn Session 2009 Week 6 1 Learning Objectives Distinguish a static budget from a flexible budget Develop a flexible budget and compute flexible-budget variances and sales-volume variances Explain why standard costs are often used in variance analysis Compute variances for direct-materials and direct labour Compute variances for variable overheads Explain how the variable overhead efficiency variance different from the efficiency variance for a direct costs Compute the fixed overhead variances Reconciles the actual overhead incurred with the overhead amounts allocated using the 4-variance analysis approach 2 Basic Concepts z Variance – difference between an actual and an expected (budgeted) amount z Management by Exception – the practice of focusing attention on areas not operating as expected (budgeted) z Static (Master) Budget – is based on the output planned at the start of the budget period z Static-Budget Variance (Level 0) – the difference between the actual result and the corresponding static budget amount 3 z Favorable Variance (F) – has the effect of increasing operating income relative to the budget amount z Unfavorable Variance (U) – has the effect of decreasing operating income relative to the budget amount 4 Static and Flexible Budgets Static Budget Planned level of output at start of the budget period Based on Flexible Budget Budgeted revenues and cost based on actual level of output Based on 5 Limitation of Static Budget It does not consider situation if sales or production levels are not achieved 6 Page 1 of 10

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Flexible Budget z Flexible Budget – shifts budgeted revenues and costs up and down based on actual operating results (activities) z Represents a blending of actual activities and budgeted dollar amounts z Will allow for preparation of Levels 2 and 3 variances z Answers the question: “Why were we off?” 7 Preparing a Flexible Budget To answer the question we must flex the budget to the actual level of activity. To flex a budget for different activity levels, we must know how costs behave with changes in activity levels. z Total variable costs change in direct proportion to changes in activity. z Total fixed costs remain unchanged within the relevant range. 8 Steps in Developing Flexible Budgets Step 1: Determine budgeted selling price, variable cost per unit, and budgeted fixed cost. Step 2: Determine the actual quantity of output. Step 3: Determine the flexible budget for revenues. Step 4: Determine the flexible budget for costs. 9 Variances z Variances may start out “at the top” with a Level 0 analysis z This is the highest level of analysis, a super-macro view of operating results z The Level 0 analysis is nothing more than the difference between actual and static-budget operating income z Further analysis decomposes (breaks down) the Level 0 analysis into progressively smaller and smaller components z Answers: “How much were we off?” 10 z
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Week 6 Flexi budget and variances - Learning Objectives...

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