Static budget = master budget

Static-budget variance: the difference between the actual result and the corresponding static budget
amount.

Favourable variance (F): has the effect of increasing operating income relative to the budget
amount.

Unfavourable variance (U): has the effect of decreasing operating income relative to the budget
amount.

Cost increase -> unfavourable

Revenue decreases -> unfavourable

Level 1 analysis: static-budget variance -> static-budget variances = actual results – static budget

Flexible budget: shifts budgeted revenues and costs up and down based on actual operating result
(activities)

Level 2: variances (flexible-budget variances and sales-volume variance) sum = static-budget

variances

Flexible-budget variance = actual result – flexible budget

Sales-volume variances = flexible budget – static budget

Flexible budget = budget price*actual volume

Level 3: dr materials variance (dr materials price variance + dr materials efficiency variance), dr
manufacturing labour variance (dr manufacturing labor price variance + dr manufacturing labour
efficiency variance)

22. actual output = 9,000

Actual Static Flexible budget = Flexible-budget

cost budget budget price*actual variances = actual cost –
volume flexible budget
DM $373,500 $410,000 9000*41 = $369,000
DML 48,600 50,000 9000*5 = $45,000
D 103,500 110,000 9000*11 = 99,000
marketing
labour
25.
Static- Percentage Flexible Flexible- Sales-volume
budget budget = budget variance =
variance = budget variance = flexible
actual result price*actual actual result budget –
– static volume – flexible static budget
budget budget
Units 350000 – 15,000/335,000 = 350,000 0F 350,000 –
335000 = 4.48% 335,000 =
$15,000 F 15,000 F
Revenues 2,012,500 – 36,000/1,976,50 350,000*5.9 2,012,500 – 2,065,000 –
1,976,500 = 0 = 1.82% = $2,065,000 2,065,000 = 1,976,500 =
$36,000 F -52,500 U $88,500 F
Variable 1,137,500 – 99,000/1,038,50 350,000*3.1 1,137,500 – 1,085,000 –
manufacturing 1,038,500 = 0 = 9.53% = $1,085,000 1,085,000 = 1,038,500 =
costs $99,000 U $52,500 U $46,500 U
Contribution 875,000 – 63,000/938,000 = 350,000*2.8 875,000 – 980,000 –
margin 938,000 6.72% = $980,000 980,000 = 938,000 =
=$63,000 U 105,000 U $42,000 F

25.2 Budget price per unit = 1,976,500/335,000 = $5.9

Budget variable manufacturing costs per unit = 1,038,500/335,000 = $3.1

Budget contribution margin per unit = 938,000/335,000 = $2.8

Static budget variance = $63,000

Flexible-budget variance = $105,000

Sales-volume variance = 42,000

25.3

Actual selling price = 2,012,500/350,000 = $5.75

Selling-price variance = 5.9 – 5.75 = $0.15

26

static budget actual results flexible budget flexible-budget variance

dm 10000 pounds 11000 pounds 10750
0.7 0.65 0.7
7000 7150 7525 375 F
production unit 40000 43000 43000

DM
actual cost accured = actual dm input*actual price
7150 price variance 550 F
actual purchasing dm input*budget 7700
budget dm for actual output*budget 7525
efficiency varia 175 U
34

static-budget varianc -57500 U

actual resuflexible-budgeflexible sales-volume varian

static budget
unit 5100 0F 5100 -1000 U 6100
DM 1149400 7000 U 1142400 -224000 F 1366400
DML 572900 -8500 F 581400 -114000 F 695400
revenues 3723000 153000 F 3570000 -700000 U 4270000
contributi 2000700 154500 F 1846200 -362000 U 2208200
fixed costs 1200000 -150000 F 1350000 0F 1350000
operating 800700 304500 F 496200 -362000 U 858200
COMPUTE PRICE AND EFFICIENCY VARIANCES FOR DM AND DML

DM
actual cost occurred 1149400 actual input*actual cost
actual purchasing dm input*budget 980000
cost variances 169400 U
actual used dm input*budget price 980000
budget dm for actual output*budge1142400 F
efficiency variance 162400
7000 U
DML
actual cost occurred 572900
actual dml input*budget price 510000
cost variances 62900 U
budget dml for actual output*budg 581400
efficiency variances 71400 F
8500 F
38

actual input*actual price

titanium purch 5200 17 88400
actual purchasing input*budget price price varia -5200 F
5200 18 93600

titanium used actual used input*budget price

4700 18 84600 efficiency 27000 U
budget dm for actual output*budget price (flexible budget)
3200 18 57600

38.2

The price variance is due to the difference between budget price $18 and actual price $17

The efficiency variance is due to the difference between actual used dm 4700 pounds and budget
dm for actual output 3200 pounds (more titanium, more time to manufacture).

38.3

Yes, it is not a good idea. Even though they can save the cost of dm through buying dm with lower
price, they have to use more dm for production. The additional cost for more material usage is
higher than the saving amount of buying material at lower price. Therefore, it is an unfavourable
variances.

38.4

Performance evaluation should not be based solely on price variances, because the price reduction
maybe lead to higher usage rate. So his evaluation should be based on the total costs of company as
a whole.

Performance evaluation should not be based solely on efficiency variances, because this evaluation
is not considered to quality and price of materials.

In general, it is important for manager to understand the causes of a variance because the
favourable variances could lead to unfavourable efficiency variance at the end, so he/she has to
consider all of the problems lies beneath every variance.

38.5

Apart from performance evaluation, variances also help manager to find out the problems and
improve future decision-making process. Variances also allow manager to have a deeper view into
the production process in different aspects instead of focusing only on price or efficiency.

38.6

Reduce the product quality  customer trust and loyal from customer, retail partners,  maybe
higher warranty costs and decrease sales.
In case the company go back to previous suppliers, they could reject to partner again.
41.

41.1

standard direct manuf labour hour for actual output = 0.5*4700 = 2350

41.2

Flexible budget for LH = 2350*16 = 37600

Flexible budget manuf labour hours = 37600 – 2000 = 35600

Flex-budget labour hours = 35600/16 = 2225

41.3

Flex-budget DML variance = 2000-1700 = $300 U

Actual = 37600 – 300 = 37300

Actual price = 37300/2225 = 17