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Int. Acc. MA LECT 6: CH 15 variance analysis part 1: (Illustrate how a…
Int. Acc. MA LECT 6: CH 15 variance analysis part 1:
Describe the difference between a static budget and a flexible budget
Static budget
Based on one level of output.
Based on the
planned output
level
Calculated at the start of the period
Does not change after it is set
Flexible budget
Calculated at the end of the period
Based on the
actual output, actual revenue or cost drivers
Budget
= A plan for the future operations of a firm
Examples: Production budget, direct materials budget, direct labour budget, manufacturing overhead budget, marketing budget
Static-budget variance
Variances:
Help the firm to identify problem areas and make improvements
Static-budget variance:
Level 0 variance analysis:
Static-budget variance of operating profit =
(Actual operating profit - budgeted operating profit)
Level 1 variance analysis:
Provides detailed information on the static-budget variance of operating profit
Variance analysis-summary
An unfavourable variance:
actual operating profit < budgeted operating
actual revenues < budgeted revenues
actual costs > budgeted costs
Favourable variance: A variance that increases operating profit
A favourable variance:
actual operating profit > budgeted operating
actual revenues > budgeted revenues
actual costs < budgeted costs
Unfavourable variance: A variance that decreases operating profit
Illustrate how a flexible budget can be developed and calculate flexible-budget & sales-volume variances
Step 2:
Determine the actual quantity of the revenue driver
Step 3
: Determine the flexible budget for revenues based on budgeted selling price and actual output sold.
Step 1:
Determine budgeted variable and fixed costs, budgeted selling price per unit
Step 4:
Determine the actual quantity of the cost
drivers.
Step 5:
Determine the flexible budget for costs based on budgeted variable costs per output unit, budgeted fixed costs and the actual quantity of the cost drivers.
Level 2 variance analysis
Level 2 analysis provides information on the two components of the static-budget variance.
1. Flexible-budget variance
:Difference between the operating profit generated by a flexible budget and actual results
2. Sales-volume variance
:Difference between the operating profit generated by a flexible budget and a static budget