Variances Summary

8/8/2019 Variances Summary

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Variances

Short summary


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Static BudgetsStatic Budgets

AA static budgetstatic budget( masterbudget)is prepared foronly( masterbudget)is prepared foronlyonelevel ofa giventype ofactivity.onelevel ofa giventype ofactivity.

Allactualresultsarecompared withtheAllactualresultsarecompared withtheoriginal budgeted amounts,evenifsalesoriginal budgeted amounts,evenifsales

volumeis more orlessthan originally planned.volumeis more orlessthan originally planned.


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Master Budget Variance: SalesMaster Budget Variance: Sales

Thevariances ofactualresultsThevariances ofactualresultsfrom the masterbudgetarecalledfrom the masterbudgetarecalledmaster(static) budgetvariances.master(static) budgetvariances.


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Master Budget Variance: ExpensesMaster Budget Variance: Expenses

ActualexpensesthatarelessthanActualexpensesthatarelessthanbudgeted expensesresultinbudgeted expensesresultinfavorableexpensevariances.favorableexpensevariances.

ActualexpensesthatexceedActualexpensesthatexceedbudgeted expensesresultinbudgeted expensesresultin

unfavorableexpensevariances.unfavorableexpensevariances.


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Flexible BudgetFlexible Budget

AA flexible budgetflexible budget(variable budget)isa(variable budget)isabudgetthatadjusts forchangesinsalesbudgetthatadjusts forchangesinsales

volumeand othercostvolumeand othercost--driveractivitiesdriveractivities..


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Flexible Budget FormulasFlexible Budget Formulas

To develop a flexible budget, managersTo develop a flexible budget, managers

determinerevenueand cost behaviordeterminerevenueand cost behavior(withintherelevantrange) with(withintherelevantrange) withrespectto cost drivers.respectto cost drivers.


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Evaluation ofFinancial PerformanceEvaluation ofFinancial Performance

UnitsUnits 7,0007,000 9,0009,000 2,000U2,000USalesSales $217,000$217,000 $279,000$279,000 $62,000U$62,000UVariablecostsVariablecosts 152,600152,600 196,200196,200 43,60043,600 FFContribution marginContribution margin $ 64,400$ 64,400 $ 82,800$ 82,800 $18,400U$18,400UFixed costsFixed costs 70,00070,000 70,00070,000 Operating incomeOperating income $ (5,600)$ (5,600) $ 12,800$ 12,800 $18,400U$18,400U

MasterMasterbudgetbudget

FlexibleFlexiblebudgetbudget

for actualfor actualsalessales

activityactivity

SalesSales--activityactivity

variancesvariances

Total master budget variances = $11,570 + $12,800 = $24,370Total master budget variances = $11,570 + $12,800 = $24,370


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Isolating the Causes of VariancesIsolating the Causes of Variances

EffectivenessEffectiveness isthe degreeto whichisthe degreeto whicha goal, objective, ortargetis met.a goal, objective, ortargetis met.

Performance may beeffective,Performance may beeffective,efficient, both, orneither.efficient, both, orneither.

EfficiencyEfficiencyisthe degreeto whichinputsareisthe degreeto whichinputsareused inrelationto a givenlevel of outputs.used inrelationto a givenlevel of outputs.


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FlexibleFlexible--Budget VariancesBudget Variances

Total flexibleTotal flexible--budgetvariancebudgetvariance= Totalactualresults= Totalactualresults

Total flexibleTotal flexible--budget planned resultsbudget planned results

FlexibleFlexible--budgetvariancesbudgetvariances

ActualActualresultsresults

$(11,570)$(11,570)

FlexibleFlexiblebudgetbudget$(5,600)$(5,600)

$5,970Unfavorable$5,970Unfavorable


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SalesSales--Activity VariancesActivity Variances

TotalsalesTotalsales--activityvarianceactivityvariance

==

Actualsales unitActualsales unit Masterbudgeted sales unitsMasterbudgeted sales units

Budgeted contribution margin perunitBudgeted contribution margin perunit


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Sales priceand SalesVolume

Variances Sales prices fluctuations cause variance: The

sales-price variances arises because acompany increased or decreased its sales

price when compared with the budgetedsales price.

SPV = (Act. Sale Price Exp. Sale Price) XAct. Sales Volume

Volume fluctuations cause variance: The

sales-volume variance, which arises from anincrease or decrease in units sold.

SVV = (Act. Sales Vol. Bud. Sale Vol.) XUnit Contribution Margin


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Variances from Material and LaborVariances from Material and Labor

StandardsStandards

Flexible budget ortotalFlexible budget ortotalstandard costallowedstandard costallowed

Units of good outputachievedUnits of good outputachieved

Inputallowed perunit of outputInputallowed perunit of output

Standard unit price ofinputStandard unit price ofinput

==

Standard DirectStandard Direct--MaterialsCost Allowed:MaterialsCost Allowed:


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Price and Usage VariancesPrice and Usage Variances

(Actual quantity(Actual quantity Standard quantity)Standard quantity) Standard priceStandard price

(Actual price(Actual price Standard Price)Standard Price)

Actual quantityActual quantity


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VariableVariable--OverheadOverhead

Eff

iciency VarianceEff

iciency Variance

WhenactualcostWhenactualcost--driveractivity differs fromdriveractivity differs fromthestandard amountallowed fortheactualthestandard amountallowed fortheactual

outputachieved,aoutputachieved,avariablevariable--overheadoverheadefficiency varianceefficiency variance will occur.will occur.


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VariableVariable--OverheadOverhead

Spending VarianceSpending Variance

Thisisthe difference betweentheactualThisisthe difference betweentheactualvariable overhead and theamountvariable overhead and theamountofvariable overhead budgeted fortheofvariable overhead budgeted forthe

actuallevel ofcostactuallevel ofcost--driveractivity.driveractivity.


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AH AR

Spending variance = AH(AR - SVR)

Efficiency variance = SVR(AH - SH)

Spending

Variance

Efficiency

Variance

Actual Flexible Budget Flexible BudgetVariable for Variable for VariableOverhead Overhead at Overhead atIncurred Actual Hours Standard Hours

AH SVR SH SVR

Variable Overhead Variances


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Budget

Variance

Volume

VariancePredetermined FOVH= Budgeted Fixed OVH/normal activity level of cost driver

Cost driver = units produced, direct labor

hours, machine hours etc.

cost driver predet.overhead rate

Actual Fixed Fixed FixedOverhead Overhead OverheadIncurred Budget Applied

Fixed Overhead Variances

Documents

Variances Summary