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Introduction to Management Accounting

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Introduction to Management Accounting

Chapter 8

Flexible Budgets and


Variance Analysis

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Favorable and Unfavorable Variances


Favorable variances arise
when
actual
results exceed budgeted.
Unfavorable variances arise when
actual results fall below
budgeted.
Favorable (F) versus Unfavorable (U)
Variances
Profit Revenue Costs
Actual > Expected
F
F
U
Actual < Expected
U
U
F

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Learning
Objective 1

Static and Flexible Budgets

A static budget is prepared for only one level


of a given type of activity. Differences between
actual results and the static budget for level
of output achieved are static-budget variances.
A flexible budget (variable budget) adjusts
for different levels of activities. Differences
between actual results and the flexible
budget are flexible-budget variances.

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Learning
Objective 2

Flexible Budget Formulas

To develop a flexible budget, managers


determine revenue and cost behavior
(within the relevant range) with
respect to cost drivers.
Note that the static budget is just
the flexible budget for a single
assumed level of activity.

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Learning
Objective 4

Evaluation of Financial
Performance
Actual results may differ from
the master budget because...

1) sales and other cost-driver activities were


not the same as originally forecasted, or

2) revenue or variable costs per unit of activity and


fixed costs per period were not as expected.

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Evaluation of Financial Performance

Flexib
Actua
le
l
Salesbudge
resul Flexiblet for Activity Stati
ts at budget
c
actua variance actual Variance
Budg
sales
s
l
(4) =
activit
activi
et
(2) =
(3)(5)
y
ty
(1)-(3)
7,000
7,000
2,000U (5)9,000
level
(3)
$217,000

$217,000
$62,000 U $279,000
(1)
ble costs
158,200
5,670 U
152,600
43,600 F 196
ibution margin $ 58,730 $ 5,670 U
$ 64,400
$18,400 U $ 82
costs
70,300
300 U
70,000

70,000
ating income
$ (11,570) $5,970 U
$(5,600)
$18,400 U $ 1

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Isolating the Causes of Variances


Managers use comparisons among
actual results, master budgets,
and flexible budgets to evaluate
organizational performance.

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

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.

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Learning
Objective 5

Flexible-Budget Variances

Total flexible-budget variance


= Total actual results
Total flexible-budget planned results
Actual
results
$(11,570)

$5,970 Unfavorable

Flexible
budget
$(5,600)

Flexible-budget variances

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Sales-Activity Variances

Actual
otal sales - activity variance
= sales unit Master budgeted sales units

Budgeted contribution margin per unit


Flexi
ble
budg
et

(7,000 9,000) $9.20


$18,400
Unfavorable
=

Maste
r
budg
et

Activity-level variances

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

When to Investigate Variances

When should management


investigate a variance?
Many organizations have developed
such rules of thumb as investigate
all variances exceeding $5,000 or 25%
of expected cost, whichever is lower.

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Comparison with Prior Periods

Some organizations compare the most


recent budget periods actual results with
last years results for the same period.

These comparisons are not as useful as comparisons


of actual outcomes with planned results.

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

The End

End of Chapter 8

Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle