Chapter 7 Flexible Budgeting and Variance Analysis.doc -...

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CHAPTER 7FLEXIBLE BUDGETS, DIRECT COST VARIANCES, AND MANAGEMENT CONTROLThis is intended to help you when reading the chapter from thetextbook. I. LEARNING OBJECTIVES1.Distinguish a static budget from a flexible budget2.Develop flexible budgets and compute flexible-budget variances and sales-volume variances3.Explain why standard costs are often used in variance analysis4.Compute price variances and efficiency variances for direct-cost categories5.Understand how managers use variances6.Perform variance analysis in activity-based costing systems7.Describe benchmarking and how it is used in cost managementII. CHAPTER SUMMARYBudgets represent an estimateof expected revenues, costs, and income for a period of time, so itshould not be surprising that actual net income for the budget period is usually different than thebudgeted net income for that same period. Companies perform variance analysis to helpunderstand why there are differences(variances) between actual and budgeted figures. Chapter 7discusses specific techniques that can be used by managers to gain a better understanding of whythese variances occurred and to assist in future planning and decision making. In the previouschapter (chapter 6) the emphasis was on preparation of the budget, in this chapter the emphasis ison using the information gathered through variance analysis to evaluate performance and providefeedback that will help in future decision making.7-1
III. CHAPTER MATERIALA static budgetis the budget prepared by a business prior to the start of the budget period. Aflexible budgetis a budget prepared by a business after the budget period has ended, as part ofthe variance analysis process. A flexible budget uses the same underlying fixed cost and per-unitcost (standards) and revenue assumptions as the original static budget. The only differencebetween a static budget and a flexible budget is that the flexible budget uses actualoutput levelsinstead of budgeted output levels. The difference between the actual results and the originalbudget is called the static budget variance. The difference between the actual results and theflexible budget is called the flexible budget variance. A favorable varianceis any differencethat results in increased operating income compared to the budgeted amount; an unfavorablevarianceis any difference that results in less operating income compared to the budgetedamount.(Please see Exhibit 7-1 on page 273 that illustrates the static-budget variance analysis for the Webb Company.)Homework: Do Exercise 7-16 on page 297 Quiz Choose the best answer and show all computations.1.[CMA Adapted] Flexible budgets

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