Professional Documents
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Flexible Budgets,
Direct-Cost Variances,
and Management Control
Terms
Variance difference between actual and budgeted amount
Management by exception focusing attention on areas not
operating as expected (budgeted)
Static (Master) Budget a point estimate based on output
planned at the start of the budget period
Terms, continued
Static budget variance (Level 0) difference between actual
results and the static budget amount
Favorable variance (F) increases operating income compared
to the budgeted amount
Unfavorable variance (U) decreases operating income
compared to the budgeted amount
Variances
Level 0 variance analysis the total variance from budget
Level 1 variance analysis disaggregates total variance into line
item variances
Levels 2 and 3 variance analysis - Progressively finer
disaggregation of the total variance
Flexible Budget
Flexible Budget shows budgeted revenues and costs adjusted
for actual volume
Flexible budget variance (level 2) Actual results compared to
flexible budget amounts
Sales volume variance (level 2) Flexible budget amounts
compared to static budget amounts
Variance Summary
Level 3 Variances
Price Variance formula:
Journal Entries
Variances may be journalized, but will not be tested on exam
Each variance has a separate account
Favorable variances are credits; Unfavorable variances are
debits
Variance accounts are generally closed to Cost of Goods Sold at
the end of the period, if immaterial
Standard Costing
Budgeted amounts and rates are actually booked
Differences between budgeted and actual amounts give rise to
variance accounts.
Standard costing is used because:
Improved software systems allow it
Variance information is extremely useful
Uses of Variances
Helps explain underlying causes of departures from budget
Performance measurement Helps evaluate effectiveness and
efficiency of employees
Promotes organizational learning
Makes continuous improvement initiatives possible
Variances are interrelated and have multiple causes
Benchmarking
Benchmarking process of comparing performance
against best performance in competing companies
Variances can be extended to include comparison to other
entities