Chapter_7_Lecture_Notes_V2 - Chapter 7 1 Learning...

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Unformatted text preview: Chapter 7 1 Learning Objectives After studying this chapter, you should be able to: 1.Distinguish between a static budget and a flexible budget 2.Develop a flexible budget and compute flexible-budget variances and sales-volume variances 3.Explain why standard costs are often used in variance analysis 4.Compute the price and efficiency variances for direct cost categories of inputs consumed 5.Understand how managers use variance analyses 6.Describe benchmarking and how it can be used by managers in cost management 2 Static vs. Flexible Budget Static (Master ) Budget Based on output planned at the start of the budget period the specific fixed level of activity expected Flexible Budget A budget which is adjusted for the actual level of output, revenue, or cost driver by shifting budgeted revenues and costs up and down based on actual operating results (activities) Represents a blending of actual activities and budgeted dollar amounts 3 Variance- Basic Concepts Defined Difference between an actual and an expected (budgeted) amount Static-Budget Variance (Level 0) the difference between the actual result and the corresponding static budget amount Favorable Variance (F) Has the effect of increasing operating income relative to the budget amount Unfavorable Variance (U) Has the effect of decreasing operating income relative to the budget amount 4 Variances Level 0 analysis is the highest level of analysis, a super-macro view of operating results Analysis is the difference between actual and static-budget operating income Further analysis decomposes (breaks down) the Level 0 analysis into progressively smaller and smaller components Levels 1, 2, and 3 examine the Level 0 variance into progressively more-detailed levels of analysis Answers: Where and why were we off? 5 A Simple Example Actual Static Indicator Results Budget Units Sold 100 90 Selling Price 35 $ 30 $ Direct Material Cost per Unit 7 $ 6 $ Direct Labor Cost per Unit 10 $ 10 $ Variable Manufacturing Overhead per Unit 5 $ 6 $ Fixed Costs 600 $ 700 $ A Simple Example Actual Results Static Budget Units Sold 100 10 F 90 Revenues 3,500 $ 800 $ F 2,700 $ Variable Costs: Direct Materials 700 160 U 540 Direct Labor 1,000 100 U 900 Variable Factory Overhead 500 (40) F 540...
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Chapter_7_Lecture_Notes_V2 - Chapter 7 1 Learning...

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