Generally in the best position to understand and

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generally in the best position to understand and explain the reason for this selling price difference. For example, was the difference due to better quality? Or was it due to an overall increase in market prices? Webb’s managers concluded it was due to a general increase in prices. The flexible-budget variance for total variable costs is unfavorable ($70,100 U) for the actual output of 10,000 jackets. It’s unfavorable because of one or both of the following: Webb used greater quantities of inputs (such as direct manufacturing labor-hours) compared to the budgeted quantities of inputs. Webb incurred higher prices per unit for the inputs (such as the wage rate per direct manufacturing labor-hour) compared to the budgeted prices per unit of the inputs. Higher input quantities and/or higher input prices relative to the budgeted amounts could be the result of Webb deciding to produce a better product than what was planned or the result of inefficiencies in Webb’s manufacturing and purchasing, or both. You should always think of variance analysis as providing suggestions for further investigation rather than as establishing conclusive evidence of good or bad performance. The actual fixed costs of $285,000 are $9,000 more than the budgeted amount of $276,000. This unfavorable flexible-budget variance reflects unexpected increases in the cost of fixed indirect resources, such as factory rent or supervisory salaries. In the rest of this chapter, we will focus on variable direct-cost input variances. Chapter 8 emphasizes indirect (overhead) cost variances. = $50,000 F = ($125 per jacket - $120 per jacket) * 10,000 jackets Selling - price variance = ¢ Actual selling price - Budgeted selling price * Actual units sold Decision Point How are flexible- budget and sales- volume variances calculated?
234 CHAPTER 7 FLEXIBLE BUDGETS, DIRECT-COST VARIANCES, AND MANAGEMENT CONTROL Price Variances and Efficiency Variances for Direct-Cost Inputs To gain further insight, almost all companies subdivide the flexible-budget variance for direct-cost inputs into two more-detailed variances: 1. A price variance that reflects the difference between an actual input price and a bud- geted input price 2. An efficiency variance that reflects the difference between an actual input quantity and a budgeted input quantity The information available from these variances (which we call level 3 variances) helps managers to better understand past performance and take corrective actions to implement superior strategies in the future. Managers generally have more control over efficiency variances than price variances because the quantity of inputs used is primarily affected by factors inside the company (such as the efficiency with which operations are performed), while changes in the price of materials or in wage rates may be largely dictated by market forces outside the company (see the Concepts in Action feature on p. 237).

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