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Variances,
and Management Control:
I
Static and Flexible Budgets
Planned level of
Static Budget Based on output at start of
the budget period
Budgeted revenues
Based on
Flexible Budget and cost based on
actual level of output
Static Budget Example
Step 1:
Determine budgeted selling price, variable
cost per unit, and budgeted fixed cost.
Budgeted selling price is $155,
variable cost is $115 per suit, and
the budgeted fixed cost is $286,000.
Steps in Developing
Flexible Budgets
Step 2:
Determine the actual quantity of output.
In the year 2004, 10,000 suits were
produced and sold.
Step 3:
Determine the flexible budget for revenues.
$155 × 10,000 = $1,550,000
Steps in Developing
Flexible Budgets
Step 4:
Determine the flexible budget for costs.
Variable costs: 10,000 × $115 = $1,150,000
Fixed costs 286,000
Total costs $1,436,000
Variances
Flexible-Budget Variance
(Level 2) in (000)
Flexible
Budget Actual Variance
Suits 10 10 0
Revenue $1,550 $1,600 $ 50 F
Variable costs 1,150 1,200 50 U
Contribution margin $ 400 $ 400 $ 0
Fixed costs 286 300 14 U
Operating income $ 114 $ 100 $ 14 U
Flexible-Budget Variance
Actual results
operating income
Flexible-budget $100,000
variance
$14,000 U Flexible-budget
operating income
$114,000
Flexible-Budget Variance
Actual Budgeted
Amount Amount
Selling price $160 $155
Variable cost 120 115
Contribution margin $ 40 $ 40
Flexible-Budget Variance
Sales-Volume Variance
(Level 2) in (000)
Flexible Static Sales-Volume
Budget Budget Variance
Suits 10 13 3U
Revenue $1,550 $2,015 $465 U
Variable costs 1,150 1,495 295 F
Contr. margin $ 400 $ 520 $120 U
Fixed costs 286 286 0
Operating income $ 114 $ 234 $120 U
Sales-Volume Variance
Flexible-budget
operating income
Sales-volume $114,000
variance
$120,000 U Static-budget
operating income
$234,000
Sales-Volume Variance
Static-budget
Level 1 variance
$134,000 U
Flexible-budget Sales-volume
Level 2 variance variance
$14,000 U $120,000 U
Standards
Actual quantity
× Standard
= – Standard price
quantity
Actual quantity
× Standard
= – Standard price
quantity
Actual AQ × BP BQ × BP
Cost 42,500 × $16.25 40,000 × $16.25
$677,875 $690,625 $650,000
$12,750 F $40,625 U
$27,875 U
Flexible Budget Labor
Variance Example
Actual AQ × BP BQ × BP
Cost 21,500 × $13.00 20,000 × $13.00
$277,350 $279,500 $260,000
$2,150 F $ 19,500 U
$17,350 U
Variance Analysis
Level 1
Static-budget variance
Materials $167,125 F
Labor 60,650 F
Total $227,775 F
Level 2 Level 2
Flexible-budget variance Sales-volume variance
Materials $27,875 U Materials $195,000 F
Labor 17,350 U Labor 78,000 F
Total $45,225 U Total $273,000 F
Variance Analysis
Level 2
Flexible-budget variance
Materials $27,875 U
Labor 17,350 U
Total $45,225 U
Level 3 Level 3
Price variance Efficiency variance
Materials $12,750 F Materials $40,625 U
Labor 2,150 F Labor 19,500 U
Total $14,900 F Total $60,125 U
Performance Measurement
Using Variances
Static Actual
Budget Amounts
Units prod.and sold 18,000 15,660
Batch size 180 174
Number of batches 100 90
Material-handling
labor-hours per batch 5.00 5.20
Flexible Budgeting and
Activity-Based Costing
Static Actual
Budget
Amounts
Total labor-hours 500 468
Cost per material-handling
labor-hour $14.00 $14.50
Total material-handling
labor cost $7,000 $6,786
Flexible Budgeting and
Activity-Based Costing