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1、Chapter 8Flexible Budgets and Variance AnalysisLEARNING OBJECTIVES:When your students have finished studying this chapter, they should be able to:1.Identify variances and label them favorable or unfavorable. 2.Distinguish between flexible budgets and static budgets.3.Use flexible-budget formulas to

2、construct a flexible budget.4.Compute and interpret static-budget variances, flexible-budget variances and sales activity budgets.5.Understand how the setting of standards affects the computation and interpretation of variances.6. Compute and interpret price and quantity variances for materials and

3、labor.7. Compute variable overhead spending and efficiency variances.8.Compute the fixed-overhead spending variance.CHAPTER 8:ASSIGNMENTSCRITICAL THINKING EXERCISES19.Interpretation of Favorable and Unfavorable Variances20. Marketing Responsibility for Sales-Activity Variances21. Production Responsi

4、bility for Flexible-Budget Variances22. Responsibility of Purchasing Manager23. Variable Overhead Efficiency VarianceEXERCISES24. Flexible Budget25. Basic Flexible Budget26. Flexible Budget27. Basic Flexible Budget28. Activity-Level Variances29. Direct-Material Variances30. Labor Variances31. Quanti

5、ty Variances32. Labor and Material Variances33. Material and Labor VariancesPROBLEMS34. National Park Service35. Flexible and Static Budgets36. Summary Explanation37. Explanation of Variance in Income38. Activity and Flexible-Budget Variances at KFC39. Summary of Airline Performance40. Hospital Cost

6、s and Explanation of Variances41. Flexible Budgeting42. Activity-Based Flexible Budget43. Straightforward Variance Analysis44. Variance Analysis45. Similarity of Direct-Labor and Variable-Overhead Variances46. Material, Labor, and Overhead Variances47. Automation and Direct Labor as Overhead48. Stan

7、dard Material Allowances49. Role of Defective Units and Nonproductive Time in Setting Standards50. Review of Major Points in This Chapter51. Review Problem on Standards and Flexible Budgets; Answers Are ProvidedCASES52. Activity and Flexible-Budget VariancesHospital 53. Activity-Based Costing and Fl

8、exible Budgeting54. Analyzing Performance 55. Complete Variance AnalysismGates Video Games 56. Nike 10k Problem: Performance StandardsEXCEL APPLICATION EXERCISE57.Flexible-Budget and Sales-Activity VariancesCOLLABORATIVE LEARNING EXERCISE58.Setting StandardsINTERNET EXERCISE59.Flexible Budgets at He

9、rshey Food Corporation()107Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.CHAPTER 8:OUTLINEI.Using Budgets to Evaluate Actual Results L. O. 1A.Favorable and Unfavorable VariancesFavorable Cost Varianceactual costs are less than budgeted costs.Favorable (F) versus Unfavorab

10、le (U) VariancesProfitsRevenuesCostsActual > ExpectedF F UActual < ExpectedU U FUnfavorable Cost Varianceactual costs exceed budgeted costs.Static Budget Variances (i.e., variances from master budget amounts) may not be very useful in helping management assess whether costs are being controlle

11、d adequately when the actual activity level differs considerably from the static budget activity level. B.Static Budgets Versus Flexible Budgets L. 0. 2All the master budgets discussed in Chapter 7 are static or inflexible, because even though they may be easily revised, the accepted budgets assume

12、fixed levels of future activity. A static budget is prepared for only one level of activity (for example, volume of sales activity). Differences between actual results and the static budget are static-budget variances.Actual results could be compared with the original plan, even though a different a

13、ctivity level was reached than was used in constructing the static budget. See EXHIBIT 8-1 for an illustration of this in the performance report. A performance report is a generic term that usually means a comparison of actual results with some budget. Variances shown on the performance report direc

14、t managements attention to significant deviations from expected results, allowing management by exception.Flexible Budget (or Variable Budget)a budget that adjusts for changes in sales volume and other cost-driver activities. It is identical to the static budget in format, but it can be prepared for

15、 any levels of activity. For performance evaluation, the flexible budget would be prepared for the actual levels of activity achieved. Differences between actual results and a flexible budget are flexible-budget variances. In contrast, the static budget is kept fixed at only the originally planned l

16、evels of activity. C.Limitations of Static-Budget VariancesD.Flexible-Budget Formulas L. O. 3The cost functions or formulas that were discussed in Chapters 2 and 3 are used in constructing flexible budgets within the relevant range of activity. See EXHIBIT 8-2 for an illustration of the use of a bud

17、get formula for the Dominion Company to create budgets for 7,000, 8,000, and 9,000 units of sales. The fixed costs/expenses are the same, in total, at each volume level. The variable costs/expenses increase by the budgeted amount for each unit increase in the activity level. Cost drivers other than

18、units sold or produced must be considered in creating flexible budgets. See EXHIBIT 8-3 for a graph of flexible budget of costs.E.Activity-Based Flexible Budgets Organizations are increasingly adopting activity-based costing (ABC) systems that have multiple cost drivers. Activity-Based Flexible Budg

19、etbased on budgeted costs for each activity center and related cost driver. ABC systems focus on activities as the primary cost objects. Costs of activity centers are then assigned to final cost objects such as products or customer classes using cost drivers. Companies that use ABC systems develop a

20、 flexible budget for each activity center. See EXHIBIT 8-4 for an illustration of Dominion Companys activity-based flexible budget.F.Static-Budget Variance and Flexible-budget Variances L. O. 4There are two types of reasons why actual performance might not have conformed to the master budget. First,

21、 sales and cost-driver activity may be different than that forecasted (Activity-Level Variances). Second, revenues or variable costs per unit of activity and fixed costs per period may not be as expected (Flexible-Budget Variances). See EXHIBIT 8-6 for an illustration of these two types of variances

22、. The sum of the flexible-budget variances and the activity-level variances is the master budget variance.II.Revenue and Cost Variances L. O. 5Managers use comparisons between actual results, master budgets, and flexible budgets to evaluate organizational performance. In evaluating performance, it i

23、s useful to distinguish Effectiveness (i.e., the degree to which a goal, objective, or target is met) and Efficiency (i.e., the degree to which inputs are used in relation to a given level of outputs). Effectiveness may be measured by determining whether the master budget goal has been met. Efficien

24、cy can be measured by comparing actual results to the flexible budget.A.Sales-Activity VariancesThese variances measure how effective managers have been in meeting the planned level of sales. The final three columns in EXHIBIT 8-6 for Dominion Company show the sales-activity variances. All unit pric

25、es and variable costs are held constant in constructing the master budget and the flexible budget. The differences between the amounts are due to the level of sales activity. The sales-activity variance indicates to managers the effect of not selling the budgeted sales level. Marketing managers are

26、typically in the best position to explain why actual sales activities differed from plans. B.Flexible-Budget Variances Flexible-budget variances measure the efficiency of operations at the actual level of activity. The differences between columns 1 and 3 in EXHIBIT 8-6 for Dominion Company are flexi

27、ble-budget variances. The total flexible-budget variance is the difference between the actual income achieved and the flexible budget income for the achieved activity level. The total flexible-budget variance arises from sales prices received, and the variable and fixed costs incurred. Flexible-budg

28、et variances may serve as the basis for periodic performance evaluation. Operations managers are in the best position to explain these variances. The variances should not be used to fix blame. Managers being evaluated may resort to cheating to beat the system.See EXHIBIT 8-7 for an expanded, line-by

29、-line computation of flexible-budget variances for Dominion Company. The variances should be interpreted as signals that actual operations have not occurred exactly as anticipated when the flexible-budget formulas were set, rather than as being good or bad. Any cost differing significantly (material

30、ly) from the flexible budget must be explained. A.Setting StandardsExpected Costthe cost that is most likely to be attained. Standard Costa carefully developed cost per unit that should be obtained. Standard Cost Systemsvalue products according to only standard costs and are used for inventory valua

31、tion purposes. For planning and control purposes, expected future costs and expected future activity levels are used to set budgets and prepare performance reports. The standard costs from the standard cost system are not necessarily used because they may differ from the expected future costs. Compa

32、nies use different cost systems for inventory valuation, product costing for decision-making, and for performance evaluation.What standard of expected performance should be used? Perfection Standards (or Ideal Standards)expressions of the most efficient performance possible under the best conceivabl

33、e conditions, using existing specifications and equipment. No provision is made for spoilage, waste, machine breakdowns, and so on. These standards are not frequently used because of the adverse effect on employee motivation resulting from their use. The unfavorable variances resulting from the use

34、of these standards indicate the improvement that is possible through continuous improvement efforts.Currently Attainable Standardslevels of performance that can be achieved by realistic levels of effort. They are set just tightly enough so that employees regard their attainment as highly probable if

35、 normal diligence and effort are exercised. These standards allow for normal defectives, waste, spoilage, and nonproductive time. Variances from these standards should be random and negligible. Another interpretation is that they are set tightly and employees regard their fulfillment as possible, th

36、ough unlikely. They can only be achieved under very efficient operations. With this interpretation, variances tend to be unfavorable while employees view them as being tough but reasonable goals. Advantages are that they can be used for financial budgeting, inventory valuation, and departmental perf

37、ormance evaluation. They also have a desirable motivational impact on employees.D.Trade-offs Among VariancesBecause the operations of organizations are linked, the level of performance in one area of operations will affect performance in other areas. Paying higher than standard costs for materials r

38、esults in an unfavorable materials price variance. However, if the higher price is due to a better-than-standard quality of material being purchased, less scrap and rework than normal may be possible, resulting in a favorable materials usage variance. The labels “favorable” and “unfavorable” are att

39、ention directors, not problem solvers. Faulty expectations may be the cause of variances rather than the execution of plans by managers. The validity of expectations must be questioned whenever variances exist.E.When to Investigate VariancesIf the variance is a result of random fluctuations, investi

40、gation is not needed. Managers expect a range of “normal” variances: this range may be based on economic (how large a dollar amount) or statistical (number of standard deviations from the expected mean) criteria. A typical investigation rule of thumb is to investigate all variances exceeding a certa

41、in dollar amount or percentage of expected cost, whichever is lower. The goal is to investigate those variances for which corrective action creates savings larger than the cost of investigation (i.e., benefits are greater than the costs). F.Comparisons with Prior Periods ResultsSome organizations co

42、mpare the most recent budget periods actual results with last years results for the same period or last months results rather than use the flexible budgets benchmarks. Unless the activities undertaken in the current period are nearly the same as those for the year ago period or prior month, this com

43、parison does not reveal much meaningful information.III.Analysis of Flexible-Budget Variances in Detail L. O. 6Materials, labor, and overhead variances may be subdivided into price, usage, and spending components. If direct-labor costs are small in relation to total costs, they may be treated as ove

44、rhead. Therefore, separate labor variances are not computed.A.Variances from Material and Labor StandardsVariances from material and labor standards are found by comparing the flexible budget at the actual output level with the actual costs for these items. The flexible-budget amounts are those that

45、 would have been spent for the actual output with expected efficiency. They are often labeled total standard costs allowed, computed as follows:flexible budget or= units of good output achievedstandard costs x input allowed per unit of outputallowed x standard unit price of inputB.Price and Quantity

46、 VariancesFlexible-budget variances measure the relative efficiency of achieving the actual output. The price and usage variances subdivide the flexible-budget variance. Price Variancethe difference between actual input prices and standard input prices multiplied by the actual quantity of inputs use

47、d. Quantity Variancethe difference between the quantity of inputs actually used and the quantity of inputs that should have been used to achieve the actual quantity of output. Rate Variancethe difference between actual labor rates and standard labor rates multiplied by the actual quantity of labor u

48、sed.The variances should be separated into those that are subject to a managers direct influence and those that are not. Prices are typically less controllable than usage factors. The variances, once computed, should be used to raise questions, provide clues, and direct attention rather than to expl

49、ain why budgeted operating income was not achieved. The effects of trade-offs between prices and usage should be analyzed. Was the purchase of substandard, lower-price materials a good idea?The objective is to hold either price or usage constant so that the effect of the other can be isolated (see E

50、XHIBITS 8-9 and 8-10).Direct-Material Price Variance =(actual price standard price) x actual quantityDirect-Labor Price (Rate) Variance =(actual price standard price) x actual quantityDirect-Materials Quantity Variance =(actual quantity used standard quantity) x standard priceDirect-Labor Quantity (

51、Efficiency or Usage) Variance =(actual quantity used standard quantity) x standard priceC. Summary of Materials and Labor VariancesExhibit 8-10 presents the analysis of direct material and direct labor in a format that deserves close study.D. Interpretation of Price and Quantity VariancesIf the actu

52、al price is less than standard or the actual quantity used is less than the standard quantity allowed, the variance is favorable. The opposite relationships imply unfavorable variances. See EXHIBIT 8-10 for a graphical representation of the variances.When production does not equal sales, the sales-a

53、ctivity variance is the difference between the static budget and the flexible budget for the number of units sold. In contrast, the flexible-budget cost variances compare actual costs with flexible-budgeted costs for the number of units produced. Therefore, two flexible budgets must be prepared.When

54、 the number of units of raw materials differs from the amount used in production, the price variance should be computed based on the actual amount purchased. The usage variance should still be based on the actual usage of materials as compared to the quantity allowed for the production level achieve

55、d.IV.Overhead VariancesA.Variable Overhead Variances L. O. 7The flexible-budget variance for variable overhead is subdivided into the variable-overhead efficiency variance and the variable overhead spending variance, computed as follows:Variable-Overhead Efficiency Variance =(actual quantity of stan

56、dard quantity)xstandard variable-overhead rate cost-driver unitof cost driver allowed per cost-driverVariable-Overhead Spending Variance =actual variable overhead (standard variable overheadxactual cost-driver)rate per unit of cost-driveractivity usedThe efficiency variance is controlled by regulati

57、ng the cost-driver activity and the spending variance through the price paid for variable-overhead items.See EXHIBIT 8-11 for illustrations of the general approach for subdividing the flexible-budget variances into the direct-materials price and usage variances, direct-labor price and usage variances, and variable-overhead spending and usage variances.