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Variances with examples

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flexible budge variance
sales volume variance

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Variances with examples

  1. 1. University Of Central Punjab F14 Advance Cost & Management Accounting Page 1 Basic Concepts Variance Difference between an actual and an expected (budgeted) amount Management by Exception The practice of focusing attention on areas not operating as expected (budgeted) Static budget A budget prepared for only one level of activity. It is based on the level of output planned at the start of the budget period. The master budget is an example of a static budget. Flexible budget Revenues or costs considered justified by the actual output level of the budget period. A key difference between a flexible budget and a static budget is the use of the actual output level in the flexible budget. In general, flexible budgets can also be conditioned on actual levels of other external influences Serve to implement responsibility accounting. Static-Budget Variance (Level 0) The difference between the actual result and the corresponding static budget amount. Flexible-Budget Variances (Level 1) Static budget variance decomposed according to categories. Favorable Variance (F) Has the effect of increasing operating income relative to the budget amount. Unfavorable Variance (U) Has the effect of decreasing operating income relative to the budget amount Variances Variances may start out “at the top” with a Level 0 variance the difference between actual and static- budget operating income. Answers: “How much were we off?” Levels 1, 2, and 3 examine the Level 0 variance into progressively more-detailed levels of analysis. Answers: “Where and why were we off?”
  2. 2. University Of Central Punjab F14 Advance Cost & Management Accounting Page 2 Simple Example Flexible Budget Shifts budgeted revenues and costs up and down based on actual operating results (activities). Represents a blending of actual activities and budgeted dollar amounts. Will allow for preparation of Levels 2 and 3 variances Answers the question: “Why were we off?” Sales-Volume Variance Difference between the static budget for the number of units expected to be sold and the flexible budget for the number of units that were actually sold. The only difference between the static budget and the flexible budget is the output level upon which the budget is based. Level 2 analysis Provides information on the two components of the static-budget variance. Level 1 Analysis 900 Level 0 Analysis
  3. 3. University Of Central Punjab F14 Advance Cost & Management Accounting Page 3 Flexible-budget variance: (Actual – budgeted contribution margin/unit)×actual sales mix × actual units sold Sales-volume variance: (Actual units sold × actual sales mix – budgeted units sold × budgeted sales mix) × budgeted contribution margin/unit A Flexible-Budget Example Level 3 Variances All Product Costs can have Level 3 Variances. Direct Materials and Direct Labor will be handled next. Both Direct Materials and Direct Labor have both Price and Efficiency Variances, and their formulae are the same. Price Variance = {Actual Price of Input - Budgeted Price of Input } × Actual Quantity of Input Efficiency Variance = {Actual Quantity of Input Used - Budgeted Quantity of Input Allowed for Actual Output of Input} × Budgeted Price Actual Data Direct materials purchased and used = 42,500 square yards at $15.95 Cost of direct materials = $677,875 Labor hours: 21,500 at $12.90 Cost of direct manufacturing labor = $277,350
  4. 4. University Of Central Punjab F14 Advance Cost & Management Accounting Page 4 Price variance for direct materials= ($15.95 – $16.25) × 42,500 = $12,750 F Œ Price variance for direct manufacturing labor = ($12.90 – $13.00) × 21,500 = $2,150 F Efficiency variance for direct materials = (42,500 – 40,000) × $16.25 = $40,625 U Œ Efficiency variance for direct manufacturing labor = (21,500 – 20,000) × $13.00 = $19,500 Production Volume Variance The production volume variance is associated with a standard costing system used by some manufacturers. Production Volume Variance = Budgeted fixed overhead – Fixed overhead allocated for actual output units produced To illustrate the production volume variance, let's assume that a manufacturer had budgeted $300,000 of fixed manufacturing overhead (supervisors' compensation, depreciation, etc.) for the upcoming year. During that period it expected to have 30,000 machines hours of good output. Based on this plan the manufacturer established a fixed manufacturing overhead rate of $10 per standard machine hour. If the company actually produces 29,000 standard machine hours of good output, the products will be assigned (or will have absorbed) $290,000 of the fixed manufacturing overhead. Production Volume Variance = 300,000 – 290,000 = $10,000 This will cause an unfavorable production volume variance of $10,000 Managerial Uses of Variances  To understand underlying causes of variances  Recognition of inter-relatedness of variances  Performance Measurement  Managers ability to be Effective  Managers ability to be Efficient  Effectiveness is the degree to which a predetermined objective or target is met.  Efficiency is the relative amount of inputs used to achieve a given level of output.  Performance evaluation should not be based on Variances alone  If any single performance measure, such as a labor efficiency variance, receives excessive emphasis, managers tend to make decisions that maximize their own reported performance in terms of that single performance measure “what you measure is what you get”.
  • farukhasan378

    Jan. 12, 2019

flexible budge variance sales volume variance

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