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Ch 17 Budgeting and Variance Analysis - Coggle Diagram
Ch 17 Budgeting and Variance Analysis
Budget Variances
A difference between a budgeted amount and the actual cost is called a variance
The two primary benefits provided by budgeting are to aid planning and control
Variance analysis is primarily a tool to aid control
Variance analysis necessarily takes place after-the-fact
It can identify actions to be taken to avoid additional unfavorable variances on an ongoing basis (to control the firm performance)
It is used to evaluate the performances of business units and their managers
Differences in Business Unit Budgets
In a profit managers are accountable for costs only (i.e the unit does not generate revenue)
in a revenue center managers are accountable primarily for revenues
In a cost center managers are accountable for both revenues and cost
Operating budgets will vary by type of center
Analyzing Variances
Managers will only investigate budget variances that are relatively large
Managment by exception
For business units where the cost or revenues are close to budget they assume operations are under control
However, if the variance is relatively large, they will investigate the cause of the variance
Generally create a decision rule for variance investgation, either a percentage or dollar amount
Favorable and Unfavorable Variances
A favorable variance is one that causes operating income to be higher than budgeted
An unfavorable variance is one that causes operating income to be goods than budgeted
Revenue variances are straightforward: favorable is almost always goods, unfavorable is bad
Expense variances are more complicated
If R&D cost are over budget, is that necessarily bad?
If materials cost are lower, is that necessarily good?
Disaggregating Production Expenses
The total variance for a production expense is the difference between the budget and the actual costs
Volume variance The portion that results from actual sales volume differing from budgeted volume
Price variances The portion caused by paying a different price for each unit of raw material or hour of labor than had been anticipated in the budget.
Quantity variance The portion that results from using more raw materials or labor for each unit produced than had been anticipated in the budget
Volume, Price, & Quantity Varianecs
A favorable volume variance means that the (likely variable) expense item is lower than budgeted (in total dollars) because sales volume is lower than budgeted
An unfavorable price variance means you're paying higher prices per unit than anticipated
Possible increase in raw materials cost
Possible poor negotiating with suppliers or employees
An unfavorable quantity variance means cost are higher because production inputs are unexpectedly high
indication of poor manufacturing efficiency