20 -- Standard Costs and Variance Analysis

20 -- Standard Costs and Variance Analysis - CPA BEC -...

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CPA BEC - STUDY UNIT 20 Standard Costs and Variance Analysis: Core Concepts A. Static and Flexible Budgeting 1. Variance analysis is the foundation of any performance evaluation system based on a budget. Variances are the calculated differences between the amounts budgeted and the amounts actually incurred (or, in the case of revenues, earned). When analyzing costs , always subtract actual amounts from budgeted amounts. This results in favorable variances being positive, and unfavorable variances being negative. 2. The starting point for variance analysis is the static, or master, budget . The static budget is management’s best estimate about sales, production levels, and costs for the upcoming period. The static budget for a production input is the standard quantity times the standard price. The static budget variance is the total variance to be explained. It equals the static budget minus the actual results for the period. 3. Variance analysis becomes much more meaningful when the static budget variance is separated into its two component variances . In order to do this, the flexible budget must be prepared. a. The flexible budget consists of the costs that should have been incurred given the actual level of production achieved. The flexible budget equals the actual number of outputs produced, times the standard inputs per unit of output, times the standard price per unit of input. The product of the first two elements of this equation, that is the actual number of outputs produced and the standard inputs per unit of output, yields the “expected” quantity of inputs . 4.
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20 -- Standard Costs and Variance Analysis - CPA BEC -...

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