Int. Acc. MA LECT 6: CH 15 variance analysis part 2: (Explain why…
Int. Acc. MA LECT 6: CH 15 variance analysis part 2:
Flexible-budget variance: example
Flexible-Budget Variance Level 2 variance analysis
Difference between actual and budgeted revenue and actual and budgeted costs, helps the business improve efficiency and identify problem areas.
The flexible-budget variance arises because the actual selling price, variable costs per unit and fixed costs differ from the budgeted amount.
The flexible-budget variance pertaining to revenues is often called a selling-price variance because it arises solely from differences between the actual selling price and the budgeted selling price.
The sales-volume variance is the difference between the static budget for the number of units expected to be sold and the flexible budget for the number of units that were actually sold.
Interpret the price and efficiency variances for direct-cost input categories
= (Actual price of inputs–Budgeted price of inputs) × Actual quantity of inputs
= (Actual quantity of inputs used – Budgeted quantity of inputs used) × Budgeted price of inputs.
Level 3 analysis
separates the flexible-budget variance into price and efficiency variances.
Static-budget variance: Level 0 variance analysis
(Actual operating profit - budgeted operating profit)
Flexible-budget variance for direct materials and direct labour
actual price) – (Budgeted quantity
Explain why purchasing– performance measures should focus on more factors than just price variances for input
Two attributes of performance are commonly measured:
The degree to which a predetermined
objective or target is met.
The relative amount of inputs used to achieve a given level of output.
A key use of variance analysis is in performance evaluation.
Often the causes of variances are interrelated: A favourable price variance might be due to lower quality materials.
If any single performance measure, such as a labour efficiency variance, receives excessive emphasis, managers tend to make decisions that maximise their own reported performance in terms of that single performance measure.
--> Always consider possible
among variances and not interpret variances in isolation of each other.