n0910 - Chapters 10 & 11 Notes Page 1 Variances...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapters 10 & 11 Notes Page 1 Please send comments and corrections to me at mconstas@csulb.edu Variances Companies prepare cost budgets as part of their planning process. These budgets assume a given level of activity (e.g., financial statements assume that 10,000 units will be produced and sold). Budgets that are tied to a specific level of activity are referred to as Static Budgets. Firms will compare their budgeted costs to their actual costs in order to control costs, evaluate employee performance, and evaluate the budgeting process. This comparison is done by computing Budget Variances. A variance is the dollar difference between a budgeted cost and the actual cost. Unfortunately, the actual activity level is very likely to be different from the budgeted activity level (e.g., firm actually produced 9,000 units). When dealing with Variable Costs, in order to have a meaningful comparison, the budgeted and actual costs must relate to the same activity level (e.g., comparing your actual labor costs [when you produce 9,000 units to your labor cost budget (that is based on 10,000 units)]. Consider the following analogous situation, assume that your employer asks you to: (i) produce a spectacular commercial, and (ii) reserve a 30-second spot during the Super Bowl in which you will showcase the commercial. You are given a $10 million budget for this project. Instead of producing and running the commercial, you contract with PBS to take over the sponsorship of Masterpiece Theatre from Exxon Mobil for $9 million. Coming $1 million under budget is not very impressive, when the activity that you did (Masterpiece Theatre) is significantly different than the activity assumed in the budget (Super Bowl). In order to have a valid comparison for Variable Costs, we use Flexible Budgets when computing Budget Variances. A Flexible Budget is a cost function that produces a different budgeted cost for different activity levels (e.g., Flexible Budget says that your labor cost is equal to $30 for each unit produced). Using a Flexible Budget, you can compare: (i) the actual cost, with (ii) a budgeted cost for the work that you actually did (actual activity level ). Budgets and Variances As noted above, Budget Variances are important tools used in evaluating your operations. When comparing actual results to a Flexible Budget, there can be two different reasons for a Budget Variance. For example, if your Direct Labor Costs on a particular project exceeded the amount budgeted for that project, it can be due to: (i)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapters 10 & 11 Notes Page 2 Please send comments and corrections to me at mconstas@csulb.edu paying your workers a higher rate per hour than you budgeted (Reason 1), and/or (ii) your workers spending more time doing the project than you expected (Reason 2). It is important for you to know which of the reasons is true. If the Budget Variance was due to the first reason, then you need to talk to your HRM department (or whoever hires and sets compensation). If the variance was due to the second reason, then you need to
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/13/2012 for the course ACCT 201 taught by Professor John during the Fall '08 term at CSU Long Beach.

Page1 / 11

n0910 - Chapters 10 & 11 Notes Page 1 Variances...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online