variance
the difference between actual results and budgeted performance
Management by exception
Practice where managers focus more closely on areas that are not operating as
expected and less closely on areas that are
Static budget (master budget)
Based on the level of output planned at the start of the budgeted period
The budget for the period is developed around a single (static) planned
output level
Static budget variance
The difference between the actual result and the corresponding budgeted amount in
the static budget
Favorable variance (F)
Actual revenues exceed budgeted amounts
Unfavorable variance (U):
Actual revenues are less than budgeted amount
actual result - static budget amount
static budget variance for operating income
Flexible budget
1. Calculates budgeted revenues and budgeted costs based on the actual
output in the budgeted period
2. Prepared at the end of the period
3. The hypothetical budget that a company would have prepared at the
beginning of the budget period it had correctly
3 steps in developing flexible budget
1. Identify the actual quantity of output
2. Calculate the flexible budget for revenues based on the budgeted selling
price and actual quantity of output
3. Calculate the flexible budget for costs based on the budgeted variable cost
per output unit, actua
flexible budget revenue
budgeted selling price * actual quantity of output
Flexible budget variance:
The difference between an actual result and the corresponding flexible-budget
amount
Selling-price variance:
The flexible-budget variance for revenues
Selling-price variance
(Actual selling price - Budgeted selling price ) x Actual units
sold
Sales-volume variance
The difference between a flexible budget amount and the corresponding static
budget amount
� Measures the change in the budgeted contribution margin
Budgeted contribution margin per unit
0
...
Flexible-budget variances are a better measure of sales price and cost performance
than static-budget variances because they compare actual revenues to budgeted
revenues and actual costs to budgeted costs for the same amount of output.
Variable direct-cost input variances
1Price variance:
2. Efficiency variance:
price variance
Difference between an actual input price and a budgeted input price
efficiency variance
Difference between an actual input quantity and a budgeted input quantity
1. past data
2. data from similar companies
3. standards
sources for obtaining data for budgeted input prices and budgeted input quantities
standards
a carefully determined price, quantity that is used as a benchmark for judging performance
Standard input:
Quantity of input required for one unit of output
Standard price
Price a company expects to pay for a unit of input
Standard cost
Cost of a unit of output
Price variance (rate variance)
Difference between actual price and budgeted price multiplied by the actual input
quantity
Price variance
0
...
Favorable when actual rate is less than the budgeted rate, resulting in an increase in operating income
...
Unfavorable when actual rate is more than budgeted rate, resulting in a
decrease in operating income
Efficiency variance (usage variance)
Difference between the actual input quantity used and the budgeted input quantity allowed for actual output multiplied by budgeted price
Efficiency variance
0
inefficient
A company is..... if it uses a larger quantity of input than budgeted
A company is efficient if it uses a smaller input quantity than was budgeted for
that output level
A company is ....... if it uses a smaller input quantity than was budgeted for
that output level
In-control occurrence
A variance within an acceptable range which calls for no investigation or action by managers
Performance measurement
Two attributes of performance are commonly evaluated: Effectiveness and Efficiency
Effectiveness
The degree to which a predetermined objective or target is met
Efficiency
The relative amount of inputs used to achieve a given output level