CostAccountingSeventeenthEdition,GlobalEditionChapter7FlexibleBudgets,Direct-CostVariances,andManagementControlCopyright?2021PearsonEducationLtd.LearningObjectives(1of2)7.1

Understandstaticbudgetsandstatic-budgetvariances7.2

Examinetheconceptofaflexiblebudgetandlearnhowtodevelopone7.3Calculateflexible-budgetvariancesandsales-volumevariances7.4

ExplainwhystandardcostsareoftenusedinvarianceanalysisLearningObjectives(2of2)7.5Computepricevariancesandefficiencyvariancesfordirectcostcategories7.6Understandhowmanagersusevariances7.7DescribebenchmarkingandexplainitsroleincostmanagementBasicConcepts(1of2)Variance—thedifferencebetweenactualresultsandexpected(budgeted)performanceManagementbyException—thepracticeoffocusingattentiononareasnotoperatingasexpected(budgeted)Astatic(master)budget—basedonthelevelofoutputplannedatthestartofthebudgetperiodAstaticbudgetvariance—thedifferencebetweentheactualresultandthecorrespondingstaticbudgetamountBasicConcepts(2of2)Favorablevariance(F)—hastheeffect,whenconsideredinisolation,ofincreasingoperatingincomerelativetothebudgetamountUnfavorablevariance(U)—hastheeffect,whenviewedinisolation,ofdecreasingoperatingincomerelativetothebudgetamountVariancesVariancescanbecalculatedatmultiplelevels,andthoselevelsareidentifiedwithlevelnumbers.Variancesmaystartout“atthetop”(broadest)withaLevel0analysis.Thisisthehighestlevelofanalysisandisnothingmorethanthedifferencebetweenactualandstatic-budgetoperatingincome.Levels1,2,and3examinetheLevel0variance,breakingitdownintoprogressivelymoredetailedlevelsofanalysis.Level1Analysis,IllustratedExhibit7.1Static-Budget-BasedVarianceAnalysisforWebbCompanyforApril2020aFlexibleBudgetCalculatesbudgetedrevenuesandbudgetedcostsbasedontheactualoutputinthebudgetperiodPreparedattheendoftheperiod,aftermanagersknowtheactualoutputHypotheticalbudgetthatwouldhavebeenpreparedatthestartofthebudgetperiodifthecompanyhadcorrectlyforecasttheactualoutputfortheperiodInaflexiblebudget,thesellingpriceisthesameasthestaticbudget,thebudgetedunitvariablecostisthesame,and,withintherelevantrange,totalfixedcostsarethesame.DevelopingtheFlexibleBudgetinThreeStepsIdentifytheactualquantityofoutput.Calculatetheflexiblebudgetforrevenuesbasedonthebudgetedsellingpriceandactualquantityofoutput.Calculatetheflexiblebudgetforcostsbasedonthebudgetedvariablecostperoutputunit,actualquantityofoutput,andbudgetedfixedcosts.Level2Analysis,IllustratedExhibit7.2Level2Flexible-Budget-BasedVarianceAnalysisforWebbCompanyforApril2020aSales-VolumeVariances(1of2)Sales-VolumeVariance—Thedifferencebetweenthestatic-budgetandtheflexible-budgetamounts.Itarisessolelyfromthedifferencebetweentheactualvolumeandthebudgetedvolume(fromthestaticbudget).Sales-VolumeVariances(2of2)Wemightincuranunfavorablesales-volumevarianceformanypossiblereasons:FailuretoexecutethesalesplanWeakerthananticipateddemandAggressivecompetitorstakingmarketshareUnanticipatedmarketpreferenceawayfromtheproductQualityproblemsFlexibleBudgetVariancesLevel3variancesprovideevenmoredetailedinformationthanwegetfromLevel2.AllproductcostscanhaveLevel3variances.Directmaterialsanddirectlaborwillbediscussednext.Overheadvariancesarediscussedindetailinalaterchapter.Level3variancesprovidedetailsofourlevel2flexiblebudgetvariances.Insteadofsimplyidentifyingthedifferencebetweenactualmaterialcostsand(flexible)budgetedcosts,wecanbreakthatvariancedownintoapricevariancecomponentandanefficiencycomponent.FlexibleBudgetVariances—Formulas(MaterialsandDirectLabor)PriceVarianceformula={ActualPriceofInput–BudgetedPriceofInput}xActualQuantityofInputEfficiencyVarianceformula={ActualQuantityofInputUsed–BudgetedQuantityofInputAllowedforActualOutput}xBudgetedPriceofInputLevel3Analysis,IllustratedExhibit7.3ColumnarPresentationofVarianceAnalysis:DirectCostsforWebbCompanyforApril2020a

VarianceSummaryExhibit7.4SummaryofLevel1,2,and3VarianceAnalysesObtainingBudgetedInputPricesandInputQuantitiesBudgetedinputpricesandbudgetedinputquantitiescanbeobtainedfromanumberofsources,includingactualinputdatafrompastperiods,datafromothercompaniesthathavesimilarprocessesandstandardsdevelopedbythefirmitself.Astandardisacarefullydeterminedprice,cost,orquantitythatisusedasabenchmarkforjudgingperformance.VariancesandJournalEntriesEachvariancemaybejournalized.Eachvariancehasitsownaccount.Favorablevariancesarecredits;unfavorablevariancesaredebits.Varianceaccountsaregenerallyclosedintocostofgoodssoldattheendoftheperiod,ifimmaterial.StandardCostingTargetsorstandardsareestablishedfordirectmaterialanddirectlabor.Thestandardcostsarerecordedintheaccountingsystem.Actualpriceandusageamountsarecomparedtothestandardandvariancesarerecorded.Management’sUseofVariancesPriceandefficiencyvariancesprovidefeedbacktoinitiatecorrectiveactions.Standardsareusedtocontrolcostsandguidemanager’stoappropriateinvestigationsofvariances.Managersusevarianceanalysistoevaluateperformanceafterdecisionsareimplemented.Understandwhyvariancesarise,learn,andimprovefutureperformance.BenchmarkingandVariancesBenchmarking—thecontinuousprocessofcomparingyourfirm’sperformancelevelsagainstthebestlevelsofperformanceincompetingcompaniesorincompanieshavingsimilarprocessesLet’stakealookatacommonunitofmeasurem