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
A flexible 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
Master budget
Flexible budget for actual sales activity
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
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.