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Slide 2.2.

1

2. Planning and budgetary control
systems

2.2 Static budgets and
flexible budgets &
Variance analysis
Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 2.2.2

Introduction
Flexible budgets and variances help managers
gain insights into why the actual results differ
from the planned performance. 
This chapter focuses on the difference of static
and flexible budgets and how budgets –
specifically flexible budgets – can be used to
evaluate feedback on variances and aid
managers in their control function. 

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 2.2.3

Learning Objectives
1

2

3

Describe the difference between a static
budget and a flexible budget
Illustrate how a flexible budget can be
developed and calculate flexible-budget and
sales-volume variances
Interpret the price and efficiency variances
for direct-cost input categories
Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Explain why purchasing–performance measures should focus on more factors than just price variances for inputs Describe benchmarking and how it can be used by managers in variance analysis Based upon Bhimani.2. © Pearson Education Limited 2008 . 5. Datar. Foster.Slide 2. Horngren.4 Learning Objectives (Continued) 4. Management and Cost Accounting. 4th Edition.

2. 4th Edition. Management and Cost Accounting.5 Learning Objective 1 Describe the difference between a static budget and a flexible budget Based upon Bhimani. Datar. Horngren. Foster. © Pearson Education Limited 2008 .Slide 2.

Foster. 4th Edition. © Pearson Education Limited 2008 . Horngren.6 Static and Flexible Budgets A static budget is a budget prepared for only one level of activity.Slide 2.  The master budget is an example of a static budget.  It is based on the level of output planned at the start of the budget period. Management and Cost Accounting.  Based upon Bhimani.2. Datar.

4th Edition.  A key difference between a flexible budget and a static budget is the use of the actual output level in the flexible budget.  Based upon Bhimani. Management and Cost Accounting. © Pearson Education Limited 2008 . Foster.7 Static and Flexible Budgets (Continued) A flexible budget is developed using budgeted revenues or cost amounts based on the level of output actually achieved in the budget period.Slide 2. Datar.2. Horngren.

4th Edition. © Pearson Education Limited 2008 . Datar.Slide 2. Foster. Horngren.8 Static Budget Assume that LSY manufactures and sells dress suits.  Budgeted variable costs per suit are as follows: Direct materials cost €65 Direct manufacturing labour 26 Variable manufacturing overhead 24 Total variable costs €115  Based upon Bhimani.2. Management and Cost Accounting.

500 suits.  The static budget for the year 2000 is based on selling 13. 4th Edition.000 within a relevant range between 9.  Fixed manufacturing costs are expected to be €286. © Pearson Education Limited 2008 . Horngren.000 suits. Datar. Foster.  What is the static-budget operating profit?  Based upon Bhimani.Slide 2.2.  Variable and fixed period costs are ignored in this example. Management and Cost Accounting.000 and 13.9 Static Budget (Continued) Budgeted selling price is €155 per suit.

000 Budgeted operating profit €234.000 × €155) €2. Foster.2. Horngren. Management and Cost Accounting. © Pearson Education Limited 2008 .495.015. Datar.000 Less Expenses: Variable (13.10 Static Budget (Continued)   Revenues (13.000 Fixed 286.Slide 2.000 Assume that LSY produced and sold 10. Based upon Bhimani. 4th Edition.000.000 suits at €160 each with actual variable costs of €120 per suit and fixed manufacturing costs of €300.000 × €115) 1.

Management and Cost Accounting.600.000  Based upon Bhimani.200. Horngren. © Pearson Education Limited 2008 . 4th Edition.2.000 × €120) 1.000 Fixed 300.000 × €160) €1.Slide 2. Foster.000 Actual operating profit €100. Datar.000 Less Expenses: Variable (10.11 Static Budget (Continued) What was the actual operating profit?  Revenues (10.

 Based upon Bhimani.12 Static-Budget Variance A static-budget variance is the difference between an actual result and a budgeted amount in the static budget.Slide 2. Datar.  Level 1 analysis provides more detailed information on the operating profit static-budget variance. 4th Edition. © Pearson Education Limited 2008 . Foster.2.  Level 0 analysis compares actual operating profit with budgeted operating profit. Management and Cost Accounting. Horngren.

13 Static-Budget Variance (Continued) What is the static-budget variance of operating profit?  Actual operating profit €100. © Pearson Education Limited 2008 .  Based upon Bhimani. Management and Cost Accounting.000 Budgeted operating profit 234.000 U  This is a Level 0 variance analysis. 4th Edition.Slide 2. Foster.000 Static-budget variance of operating profit €134. Horngren. Datar.2.

600 €415 U Variable costs 1.015 €1. Foster. 4th Edition. © Pearson Education Limited 2008 .Slide 2. Horngren.14 Static-Budget Variance (Continued) Static Budget Based Variance Analysis (Level 1) in (000) Static Actual Budget Results Variance Suits 13 10 3U Revenue €2. Management and Cost Accounting. Datar.200 296 F Contribution margin €520 €400 €120 U Fixed costs 286 300 14 U Operating profit €234 €100 €134 U Based upon Bhimani.2.495 1.

Datar. © Pearson Education Limited 2008 .  An unfavourable variance is a variance that decreases operating profit relative to the budgeted amount. Horngren.15 Static-Budget Variance (Continued) A favourable variance is a variance that increases operating profit relative to the budgeted amount.2.Slide 2.  Based upon Bhimani. Foster. Management and Cost Accounting. 4th Edition.

Datar.2. Foster.  A favourable variance for cost items means that actual costs were less than budgeted costs. Horngren.  Based upon Bhimani. 4th Edition. Management and Cost Accounting.16 Static-Budget Variance (Continued) A favourable variance for revenue items means that actual revenues exceeded budgeted revenues.Slide 2. © Pearson Education Limited 2008 .

Management and Cost Accounting. 4th Edition.17 Learning Objective 2 Illustrate how a flexible budget can be developed and calculate flexible-budget and sales-volume variances Based upon Bhimani.Slide 2.2. Horngren. © Pearson Education Limited 2008 . Foster. Datar.

2. Management and Cost Accounting.  The budgeted selling price is €155. Datar. © Pearson Education Limited 2008 . 4th Edition.  Based upon Bhimani. budgeted variable cost per unit and budgeted fixed cost. Foster.Slide 2. the budgeted variable cost is €115 per suit and the budgeted fixed cost is €286. Horngren.18 Steps in Developing Flexible Budgets Step 1: Determine budgeted selling price.000.

 Step 3: Determine the flexible budget for revenues based on budgeted selling price and actual quantity of output. Datar.550.  €155 × 10. Management and Cost Accounting. Horngren. Foster.000 = €1.  10.Slide 2.000  Based upon Bhimani.000 suits were produced and sold in the year 2000. 4th Edition.2. © Pearson Education Limited 2008 .19 Steps in Developing Flexible Budgets (Continued) Step 2: Determine the actual quantity of output.

2. © Pearson Education Limited 2008 .Slide 2.  Flexible budget: Variable costs (10. Management and Cost Accounting.000 Total costs €1.000 Fixed costs 286. Horngren. 4th Edition. Datar. Foster.20 Steps in Developing Flexible Budgets (Continued) Step 4: Determine the flexible budget for costs based on budgeted variable costs per output unit.000  Based upon Bhimani. actual quantity of output and the budgeted fixed costs.000 × €115) €1.436.150.

4th Edition.2. Horngren. © Pearson Education Limited 2008 .Slide 2. Foster. Datar.21 Variances  1 2 Level 2 analysis provides information on the two components of the static-budget variance. Flexible-budget variance Sales-volume variance Based upon Bhimani. Management and Cost Accounting.

Slide 2.600 Variable costs 1. 4th Edition. Horngren.2.150 1. © Pearson Education Limited 2008 . Management and Cost Accounting.550 €1. Datar.22 Flexible-Budget Variance Flexible-Budget Variance (Level 2) in (000) Flexible Actual Budget Results Suits 10 10 Revenue €1.200 Contribution margin €400 €400 Fixed costs 286 300 Operating profit €114 €100 Variance 0U €50 F 50 U €0 U 14 U €14 U Based upon Bhimani. Foster.

Slide 2.000 Flexible-budget variance Flexible-budget €14. Horngren.000 U operating profit €114.23 Flexible-Budget Variance (Continued) Actual quantity sold:10.2.000  Based upon Bhimani.000 suits Actual results operating profit €100. Datar. Management and Cost Accounting. 4th Edition. © Pearson Education Limited 2008 . Foster.

Horngren. variable costs per unit.Slide 2. Foster. © Pearson Education Limited 2008 . Management and Cost Accounting. quantities and fixed costs differ from the budgeted amount. Datar.24 Flexible-Budget Variance (Continued) The flexible-budget variance arises because the actual selling price. 4th Edition.2.  Actual Budgeted Amount Amount Selling Price €160 €155 Variable cost €120 €115  Based upon Bhimani.

© Pearson Education Limited 2008 .  Actual selling price exceeds the budgeted amount by €5. 4th Edition.25 Flexible-Budget Variance (Continued) The flexible-budget variance pertaining to revenues is often called a selling-price variance because it arises solely from differences between the actual selling price and the budgeted selling price. Horngren.  Selling-price variance = (€160 – €155) × 10.2. Foster.  Based upon Bhimani. Datar. Management and Cost Accounting.Slide 2.000 F.000 = €50.

Horngren.2.000 U Total flexible-budget variance €14.26 Flexible-Budget Variance (Continued) Why is the flexible-budget variance €14. © Pearson Education Limited 2008 .000 U  Based upon Bhimani. 4th Edition. Management and Cost Accounting. Datar.000 F Actual variable costs exceeded flexible budget variable costs 50.000 U Actual fixed costs exceeded flexible budget fixed costs 14.Slide 2. Foster.000 unfavourable?  Selling-price variance €50.

Slide 2. Horngren. Management and Cost Accounting.2.  The only difference between the static budget and the flexible budget is the output level upon which the budget is based. © Pearson Education Limited 2008 . Foster.  Based upon Bhimani.27 Sales-Volume Variance The sales-volume variance is the difference between the 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. Datar. 4th Edition.

2. Management and Cost Accounting.495 295 F Contr.550 €2. Horngren. Foster. 4th Edition.Slide 2.015 €465 U Variable costs 1. margin €400 €520 €120 U Fixed costs 286 286 0 Operating profit €114 €234 €120 U Based upon Bhimani.150 1. Datar. © Pearson Education Limited 2008 .28 Sales-Volume Variance (Continued) Sales-Volume Variance (Level 2) in (000) Flexible Static Sales-Volume Budget Budget Variance Suits 10 13 3U Revenue €1.

4th Edition. © Pearson Education Limited 2008 . Foster.000  Based upon Bhimani.2. Management and Cost Accounting. Datar. Horngren.Slide 2.000 Sales-volume variance Static-budget €120.29 Sales-Volume Variance (Continued) Actual quantity sold: 10.000 suits Flexible-budget operating profit €114.000 U operating profit €234.

© Pearson Education Limited 2008 . 4th Edition.Slide 2.30 Sales-Volume Variance (Continued) Why is the sales-budget variance €120.000 U  Budgeted contribution margin per unit: (€155 – €115) = €40  3.000 Variance 3.000 Actual units sold 10. Datar.000 unfavourable variance  Based upon Bhimani. Horngren.000 × €40 = €120.000 unfavourable?  Static budget units 13. Foster. Management and Cost Accounting.2.

000 U Sales-volume variance €120.000 U Based upon Bhimani. 4th Edition. © Pearson Education Limited 2008 . Management and Cost Accounting.31 Budget Variances Level 1 Level 2 Static-budget variance €134. Foster. Datar.000 U Flexible-budget variance €14.2.Slide 2. Horngren.

32 Learning Objective 3 Interpret the price and efficiency variances for direct-cost input categories Based upon Bhimani. Datar.Slide 2.2. Foster. © Pearson Education Limited 2008 . Management and Cost Accounting. 4th Edition. Horngren.

Management and Cost Accounting. Datar. Foster. Horngren.  The following relates to LSY:  Direct materials purchased and used: 42.33 Price and Efficiency Variances Level 3 analysis separates the flexible-budget variance into price and efficiency variances.Slide 2.2.500 square metres  Actual price paid per metres: €15.95  Based upon Bhimani. 4th Edition. © Pearson Education Limited 2008 .

95 = €677. Datar.875  What is the actual cost of direct manufacturing labour?  21. Management and Cost Accounting.350  Based upon Bhimani.90 = €277. © Pearson Education Limited 2008 . Foster.500 × €12. Horngren.34 Price and Efficiency Variances (Continued) Actual direct manufacturing labour-hours: 21.500 × €15. 4th Edition.90  What is the actual cost of direct materials?  42.Slide 2.2.500  Actual price paid per hour: €12.

 Based upon Bhimani. 4th Edition. Datar. © Pearson Education Limited 2008 .2. Management and Cost Accounting.35 Price Variances A price variance is the difference between the actual price and the budgeted price of inputs multiplied by the actual quantity of inputs. Horngren. Foster.Slide 2. – Input-price variance – Rate variance  Price variance = (Actual price of inputs – Budgeted price of inputs) × Actual quantity of inputs.

Datar.95 – €16.500 = €2.25) × 42.150 F  Based upon Bhimani.36 Price Variances (Continued) What is the price variance for direct materials?  (€15. Management and Cost Accounting.90 – €13.750 F  What is the price variance for direct manufacturing labour?  (€12.500 = €12. © Pearson Education Limited 2008 . Horngren.2. Foster.00) × 21. 4th Edition.Slide 2.

875 Actual Quantity of Inputs at Budgeted Price 42.25 = €690. Foster. Management and Cost Accounting. © Pearson Education Limited 2008 .2.500 × €15.500 × €16.750 F Materials price variance Based upon Bhimani.95 = €677.37 Price Variances (Continued) Actual Quantity of Inputs at Actual Price 42.625 €12. Horngren. 4th Edition.Slide 2. Datar.

Datar.350 Actual Quantity of Inputs at Budgeted Price 21. 4th Edition.Slide 2.500 × €13.00 = €279.500 × €12.150 F Labour price variance Based upon Bhimani. © Pearson Education Limited 2008 .500 €2. Foster. Management and Cost Accounting.38 Price Variances (Continued) Actual Quantity of Inputs at Actual Price 21.2. Horngren.90 = €277.

39 Price Variances (Continued) What is the journal entry when the materials price variance is isolated at the time of purchase?  Materials Control 690.750 Accounts Payable Control 677. Horngren. © Pearson Education Limited 2008 . Datar.2.625 Direct Materials Price Variance 12.875 To record direct materials purchased. Management and Cost Accounting.  Based upon Bhimani.Slide 2. Foster. 4th Edition.

Labour prices were set without careful analysis of the market. 4th Edition. Management and Cost Accounting. © Pearson Education Limited 2008 .Slide 2. Based upon Bhimani. Foster. Horngren.2. Datar.40 Price Variances (Continued)  – – What may be some of the possible causes for LSY’s favourable price variances? LSY’s purchasing manager negotiated more skilfully than was planned.

 Based upon Bhimani. Management and Cost Accounting.  Efficiency variance = (Actual quantity of inputs used – Budgeted quantity of inputs allowed for actual output) × Budgeted price of inputs.41 Efficiency Variances The efficiency variance is the difference between the actual and budgeted quantity of inputs used multiplied by the budgeted price of input. Horngren. Datar. © Pearson Education Limited 2008 . 4th Edition.Slide 2. Foster.2.

Slide 2.25 = €40.500 U  Based upon Bhimani.000) × €16.00 = €19. 4th Edition. Datar.625 U  What is the efficiency variance for direct manufacturing labour?  (21.000) × €13.42 Efficiency Variances (Continued) What is the efficiency variance for direct materials?  (42. Horngren.2. Foster.500 – 20.500 – 40. Management and Cost Accounting. © Pearson Education Limited 2008 .

43 Efficiency Variances (Continued) Actual Quantity of Inputs at Budgeted Price 42.625 Budgeted Quantity Allowed for Actual Outputs at Budgeted Price 40.Slide 2. Management and Cost Accounting. 4th Edition.500 × €16.000 €40. © Pearson Education Limited 2008 . Foster. Datar. Horngren.2.25 = €690.625 U Materials efficiency variance Based upon Bhimani.25 = €650.000 × €16.

500 Budgeted Quantity Allowed for Actual Outputs at Budgeted Price 20.00 = €260.000 €19.000 × €13.2. Horngren. Datar.Slide 2. © Pearson Education Limited 2008 . Foster.44 Efficiency Variances (Continued) Actual Quantity of Inputs at Budgeted Price 21. 4th Edition.500 × €13. Management and Cost Accounting.500 U Labour efficiency variance Based upon Bhimani.00 = €279.

Slide 2.000 Direct Materials Efficiency Variance 40. © Pearson Education Limited 2008 .  Based upon Bhimani. Horngren. 4th Edition.45 Efficiency Variances (Continued) What is the journal entry to record materials used?  Work-in-Progress Control 650. Foster.625 To record direct materials used. Management and Cost Accounting.2.625 Materials Control 690. Datar.

2. Management and Cost Accounting. Foster. 4th Edition. Datar. Horngren. The maintenance department did not properly maintain machines. © Pearson Education Limited 2008 . The personnel manager hired under-skilled workers.46 Efficiency Variances (Continued)  – – – What may be some of the causes for LSY’s unfavourable efficiency variances? LSY’s purchasing manager received lower quality of materials. Based upon Bhimani.Slide 2.

Foster.500 Direct Manufacturing Labour Price Variance 2. Based upon Bhimani. Datar. Management and Cost Accounting.150 Wages Payable 277. Horngren.2.350 To record liability for direct manufacturing labour.000 Direct Manufacturing Labour Efficiency Variance 19. © Pearson Education Limited 2008 .Slide 2. 4th Edition.47 Price and Efficiency Variances   What is the journal entry for direct manufacturing labour? Work-in-Progress Control 260.

2. Management and Cost Accounting.350 U Based upon Bhimani. © Pearson Education Limited 2008 . Foster.875 U What is the flexible-budget variance for direct manufacturing labour? Labour-price variance €2.625 U = €27. Horngren. Datar.48 Price and Efficiency Variances (Continued)     What is the flexible-budget variance for direct materials? Materials-price variance €12.Slide 2.500 U = €17. 4th Edition.150 F + Labour-efficiency variance €19.750 F + Materials-efficiency variance €40.

49 Variance Analysis for Direct Materials Costs Direct Materials Actual Costs 42.875 Direct Materials Static Budget 13. 4th Edition.125 F Static-budget variance for direct materials (costs less) Based upon Bhimani. Foster.2.Slide 2.000 €167. Horngren. Datar.000 × 4 × €16. © Pearson Education Limited 2008 . Management and Cost Accounting.500 × €15.25 €845.95 €677.

000 €27.2.25 €650. 4th Edition. Foster. Datar.875 U Flexible-budget variance for direct materials (costs more) Based upon Bhimani.Slide 2.875 Direct Materials Flexible Budget 40.95 €677.500 × €15.000 × €16.50 Variance Analysis for Direct Materials Costs (Continued) Direct Materials Actual Costs 42. © Pearson Education Limited 2008 . Management and Cost Accounting. Horngren.

Horngren.2.51 Variance Analysis for Direct Labour Costs What is the static-budget variance for direct labour?  Static-budget labour cost: 13. Datar.650 F  Based upon Bhimani.00/hour = €338.350 = €60. Management and Cost Accounting.Slide 2.90/hour = €277. Foster. © Pearson Education Limited 2008 . 4th Edition.000 – €277.000 suits × 2 hours/suit × €13.000  Actual labour cost: 21.500 hours × €12.350  Variance = €338.

52 Variance Analysis for Direct Labour Costs (Continued) Direct Labour Actual Costs 21. © Pearson Education Limited 2008 .650 F Static-budget variance for direct labour (costs less) Based upon Bhimani. Datar.90 €277. Management and Cost Accounting.00 €338. 4th Edition.2.Slide 2.000 €60.000 × 2 × €13. Foster.350 Direct Labour Static Budget 13.500 × €12. Horngren.

000 F  Based upon Bhimani. Datar.2. Foster.000 = €78.00/hour = €338.00/hour = €260.000 – €260. Management and Cost Accounting.000  Variance = €338. Horngren.Slide 2. 4th Edition.000 suits × 2 hours/suit × €13.53 Variance Analysis for Direct Labour Costs (Continued) What is the sales-volume variance for direct labour?  Static-budget labour cost: 13. © Pearson Education Limited 2008 .000  Flexible-budget cost for direct labour: 10.000 suits × 2 hours/suit × €13.

Slide 2.2.54

Variance Analysis for
Direct Labour Costs (Continued)
Direct Labour
Flexible Budget
10,000 × 2 × €13.00
€260,000

Direct Labour
Static Budget
13,000 × 2 × €13.00
€338,000

€78,000 F
Sales-volume variance for direct labour
(costs less)
Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 2.2.55

Variance Analysis for
Direct Labour Costs (Continued)
What is the flexible-budget variance for direct
manufacturing labour? 
Actual labour cost €277,350 – Flexible-budget
cost €260,000 = €17,350 U 

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 2.2.56

Variance Analysis for
Direct Labour Costs (Continued)
Direct Labour
Actual Costs
21,500 × €12.90
€277,350

Direct Labour
Flexible Budget
10,000 × 2 × €13.00
€260,000

€17,350 U
Flexible-budget variance for direct labour
(costs more)
Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

57 Variance Analysis Level 1 Level 2 Static-budget variance Materials €167.000 F Total €273.000 F Based upon Bhimani.Slide 2.875 U Labour 17.000 F Labour 78.350 U Total €45.225 U Sales-volume variance Materials €195. Foster.125 F Labour 60.650 F Total €227. Horngren. Datar. © Pearson Education Limited 2008 .775 F Flexible-budget variance Materials €27. Management and Cost Accounting.2. 4th Edition.

4th Edition.Slide 2.900 F Efficiency variance Materials €40. Management and Cost Accounting. Datar. © Pearson Education Limited 2008 .125 U Based upon Bhimani. Foster. Horngren.58 Variance Analysis (Continued) Level 2 Level 3 Flexible-budget variance Materials €27.875 U Labour 17.225 U Price variance Materials €12.750 F Labour 2.350 U Total €45.150 F Total €14.500 U Total €60.625 U Labour 19.2.

Management and Cost Accounting. Foster. Datar. Horngren.2. © Pearson Education Limited 2008 .Slide 2. 4th Edition.59 Learning Objective 4 Explain why purchasing–performance measures should focus on more factors than just price variances for inputs Based upon Bhimani.

4th Edition. Foster. Management and Cost Accounting. Horngren.  Based upon Bhimani. © Pearson Education Limited 2008 . Datar.  Two attributes of performance are commonly measured: 1 Effectiveness 2 Efficiency.60 Performance Measurement Using Variances A key use of variance analysis is in performance evaluation.2.Slide 2.

 Variances should not solely be used to evaluate performance. © Pearson Education Limited 2008 .  Based upon Bhimani. Horngren. Foster. 4th Edition.Slide 2.2.61 Performance Measurement Using Variances (Continued) Effectiveness is the degree to which a predetermined objective or target is met. Management and Cost Accounting. Datar.  Efficiency is the relative amount of inputs used to achieve a given level of output.

4th Edition. Datar. receives excessive emphasis.62 Performance Measurement Using Variances (Continued)  If any single performance measure. Based upon Bhimani. such as a labour efficiency variance. Management and Cost Accounting.2. managers tend to make decisions that maximise their own reported performance in terms of that single performance measure.Slide 2. Horngren. Foster. © Pearson Education Limited 2008 .

© Pearson Education Limited 2008 . Management and Cost Accounting. 4th Edition.63 Multiple Causes of Variances Often the causes of variances are interrelated. Horngren.Slide 2.  Based upon Bhimani. Foster.  A favourable price variance might be due to lower quality materials.2. Datar.  It is best to always consider possible interdependencies among variances and to not interpret variances in isolation of each other.

© Pearson Education Limited 2008 .64 When to Investigate Variances When should variances be investigated?  Frequently. Foster. Datar.2. Horngren.  Based upon Bhimani. Management and Cost Accounting. managers base their answer on subjective judgements.Slide 2. a small variable may prompt follow-up.  For other items.  For critical items. 4th Edition. a minimum monetary variance or a certain percentage of variance from budget may prompt an investigation.

© Pearson Education Limited 2008 . 4th Edition.2.65 Learning Objective 5 Describe benchmarking and how it can be used by managers in variance analysis Based upon Bhimani. Foster. Horngren. Management and Cost Accounting.Slide 2. Datar.

66 Benchmarking Benchmarking refers to the continuous process of measuring products. Management and Cost Accounting. Foster. Based upon Bhimani. © Pearson Education Limited 2008 .  The best levels of performance are often found in competing organisations or in other organisations having similar processes. Datar. services and activities against the best levels of performance.2.  Companies should ensure that the benchmark numbers are comparable.Slide 2. Horngren. 4th Edition.

in competitor organisations or at other non-competitor organisations to gauge the performance of their own managers.2.67 Benchmarking (Continued) Benchmarking facilitates companies using the best levels of performance within their organisation. Based upon Bhimani. Foster. © Pearson Education Limited 2008 . Horngren. Datar. 4th Edition.Slide 2. Management and Cost Accounting.

© Pearson Education Limited 2008 . Management and Cost Accounting.Slide 2.68 End of Chapter 2.2 Based upon Bhimani. Datar. 4th Edition. Horngren. Foster.2.