Variances

1. Variances Short summary

2. Static Budgets A static budget ( master budget) is prepared for only one level of a given type of activity. All actual results are compared with the original budgeted amounts, even if sales volume is more or less than originally planned.

3. Master Budget Variance: Sales The variances of actual results from the master budget are called master (static) budget variances.

4. Master Budget Variance: Expenses Actual expenses that exceed budgeted expenses result in unfavorable expense variances. Actual expenses that are less than budgeted expenses result in favorable expense variances.

5. Flexible Budget Aflexible budget(variable budget) is a budget that adjusts for changes in sales volume and other cost-driver activities.

6. Flexible Budget Formulas To develop a flexible budget, managers determine revenue and cost behavior (within the relevant range) with respect to cost drivers.

7. Evaluation of Financial Performance Flexible budget for actual sales activity Master budget Sales- activity variances Units 7,000 9,000 2,000 U Sales $217,000 $279,000 $62,000 U Variable costs 152,600 196,200 43,600 F Contribution margin $ 64,400 $ 82,800 $18,400 U Fixed costs 70,000 70,000 – Operating income $ (5,600) $ 12,800 $18,400 U Total master budget variances = $11,570 + $12,800 = $24,370

8. Isolating the Causes of Variances Effectiveness is the degree to which a goal, objective, or target is met. Efficiency is the degree to which inputs are used in relation to a given level of outputs. Performance may be effective, efficient, both, or neither.

9. Actual results $(11,570) Flexible budget $(5,600) $5,970 Unfavorable Flexible-budget variances Flexible-Budget Variances Total flexible-budget variance = Total actual results – Total flexible-budget planned results

10. Sales-Activity Variances Total sales-activity variance = Actual sales unit – Master budgeted sales units × Budgeted contribution margin per unit

11. Sales price and Sales Volume Variances • Sales prices fluctuations cause variance: The sales-price variances arises because a company increased or decreased its sales price when compared with the budgeted sales price. • SPV = (Act. Sale Price – Exp. Sale Price) X Act. Sales Volume • Volume fluctuations cause variance: The sales-volume variance, which arises from an increase or decrease in units sold. • SVV = (Act. Sales Vol. – Bud. Sale Vol.) X Unit Contribution Margin

12. Variances from Material and Labor Standards Standard Direct-Materials Cost Allowed: Units of good output achieved × Input allowed per unit of output × Standard unit price of input = Flexible budget or total standard cost allowed

13. Price and Usage Variances Price variance: (Actual price – Standard Price) × Actual quantity Usage variance: (Actual quantity – Standard quantity) × Standard price

14. Variable-OverheadEfficiency Variance When actual cost-driver activity differs from the standard amount allowed for the actual output achieved, a variable-overhead efficiency variance will occur.

15. Variable-OverheadSpending Variance This is the difference between the actual variable overhead and the amount of variable overhead budgeted for the actual level of cost-driver activity.

16. Variable Overhead Variances Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours AH × AR AH × SVR SH × SVR Spending Variance EfficiencyVariance Spending variance = AH(AR - SVR) Efficiency variance = SVR(AH - SH)

17. Fixed Overhead Variances Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied cost driver × predet.overhead rate Budget Variance VolumeVariance Predetermined FOVH= Budgeted Fixed OVH/ normal activity level of cost driver Cost driver = units produced, direct labor hours, machine hours etc.