Cost Accounting 2

Chapter 3
Flexible Budgets, Direct-Cost
Variances, and Management
Control

Lecturer: Abdirahman Awil

07:11 AM (MBA, BA in Finance & Accounting)
1
Learning Objectives
1. Understand static budgets and static-budget
2. Variances Examine the concept of a flexible budget and
learn how to develop it
3. Calculate flexible-budget variances and sales-volume
variances
4. Explain why standard costs are often used in variance
analysis
5. Compute price variances and efficiency variances for
direct cost categories Understand how managers use
variances
6. Describe benchmarking and explain its role in cost
management
Static budget vs Flexible budget
• A static budget forecasts revenue and expenses over a
specific period but remains unchanged even with
changes in business activity.
• The static-budget variance is the difference between
the actual result and the corresponding budgeted amount
in the static budget.
• A flexible budget is a budget that adjusts or flexes
with changes in volume or activity. The flexible budget
is more sophisticated and useful than a static budget.
• A flexible budget calculates budgeted revenues and
budgeted costs based on the actual output in the
budget period. The flexible budget is prepared at the
end of the period
Three steps of developing
flexible budget
• Step 1: Identify the Actual Quantity of Output.
• Step 2: Calculate the Flexible Budget for Revenues
Based on Budgeted Selling Price and Actual Quantity
of Output.
• Step 3: Calculate the Flexible Budget for Costs Based
on Budgeted Variable Cost per Output Unit, Actual
Quantity of Output, and Budgeted Fixed Costs.
Flexible-budget
• In April 2011, Webb produced and sold
10,000 jackets
Flexible-budget variances
and sales-volume variances
• The flexible-budget variance is the difference
between anactual result and the corresponding
flexible-budget amount.