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Flexible Budgets and Direct Variances

Flexible Budgets and Direct Variances. Class Announcements. Assignment #1 due January 27 th (MyAccountingLab); available on-line Assignment #2 due February 10 th (MyAccounting Lab) Next class: Case Analysis & Allocation, Service Learning

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Flexible Budgets and Direct Variances

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  1. Flexible Budgets and Direct Variances

  2. Class Announcements • Assignment #1 due January 27th (MyAccountingLab); available on-line • Assignment #2 due February 10th (MyAccounting Lab) • Next class: Case Analysis & Allocation, Service Learning • Accounting Case Competition at SMU March 6-7 (Halifax); one team of two-four 3rd and 4th year; please let mmoxner@stfx.ca know of by January 31, 2014 • WIB Society Session: A Conversational with Successful Business Women, February 3, SCHW 7-9:00pm

  3. Service Learning Project 2014 • A service learning project replaces traditional assignments and encompasses an outreach project on financial literacy. • Several populations have been identified (e.g., young farmers, women, seniors, new mothers, University students, etc.) for whom financial literacy workshops will be adapted and delivered. Students in groups of three to four will deliver a workshop in early March to those populations.

  4. Service Learning Project 2014 • The expectations of each student group are: • 1) be knowledgeable, not an expert, about financial decisions and financial tools; • 2) learn about the uniqueness of the financial decisions of a target population; • 3) adapt financial literacy content to address the uniqueness of that target population; and • 4) deliver a workshop on financial literacy to the target population. • .

  5. Service Learning Project 2014 • January 13 – In Class Discussion • January 20 – In Class visit from Marla Gaudet, Service Learning Program • February 3 (tentative) – Sign-up for Placement • Before the break – Meet with Danika LeBlanc • February 12 (or before the break) – Progress Report is due • March 31 – Final Report is due

  6. Service Learning Project 2014 • Service Learning Project Evaluation consists of: • 5% Client Evaluation • a contact person provide a brief evaluation based on the expectations agreed upon. • 5% Progress Report • reflect the chronology of the project in terms of coordinating personnel, meetings, individual work, group work, etc.; due on February 12th.   • 10% Report and Project Output for Targeted Population • includes description of targeted population, self-evaluation, reflection and workshop materials; due on March 31st .

  7. Class Objectives • Understanding the difference between master (static) and flexible budgets • Preparing a flexible budget to reflect actual level of activity instead of planned level of activity • Calculating variances and decomposing those variances into efficiency and spending variances

  8. Budgeting: Feedback • Budgets offer feedback in the form of variances: • actual results deviate from budgeted targets • management by exception • Variances provide managers with: • Guide managers to seek answers/solutions • Early warning of problems • A basis for performance evaluation • A basis for strategy evaluation

  9. Budgeting: Master & Flexible • Master (Operating) budget is static • it is prepared for a given level of activity • master budgets are kept static to serve as benchmark for evaluating performance • indicates variances between actual and budgeted at start of budget period • Flexible budget (variable budget) is dynamic • it is based on the same assumptions of revenue and cost behavior as the master budget • it adjust for changes in volume and other cost-driver activities

  10. Hmm! Comparingstatic budgets withactual costs is likecomparing applesand oranges. Static Budgets: Variances Static budgetsare prepared fora single, plannedlevelof activity. Performance evaluation is difficult when actual activity differs from the planned level of activity.

  11. How much of the $11,650 favorable variance is due to lower activity and how much is due to cost control? Static Budgets: Variances (L1)

  12. Flexible Budgets: Defined • A flexible budget is a budget that adjusts for changes in volume and other cost-driver activities (hypothetical budget). • Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons. • Differences between budgeted and actual results are variances • Indication of Favourable (F) or Unfavourable (U) must accompany the variance • Reveal variances related to cost control. • Improve performance evaluation.

  13. Flexible Budgets

  14. Flexible Budgets: Variances

  15. Flexible Budget: Decomposition (L3)

  16. Variance Summary

  17. Significance of Cost Variances • Size of variance • Dollar amount • Percentage of standard • Recurring variances • Trends • Controllability • Favorable variances • Costs and benefits of investigation

  18. Class Objectives – Revisted • Understanding the difference between master (static) and flexible budgets • Preparing a flexible budget to reflect actual level of activity instead of planned level of activity • Calculating variances and decomposing those variances into efficiency and spending variances • Next class: Case Analysis & Allocation

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