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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