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end of Accounting period
Main idea behind variance analysis:
ideally They are
Are budged numbers best guesses?
someone typically has to answer for deviations
Who cares if the budgeted numbers are off?
What is the variance?
difference between the budgeted amount and Actual amount
How are variances classified
-favorable (F) --> performance EXCEEDS expectations
When you have a variance you look into it...
... break down the variance into components to tell a story
budget at Actual level of sales
So flexible budgets restate ...
... the master budget at actual volume
keep Fixed Cost same from Master budget
When you are creating flexible budget how do you treat fixed costs
Sales Volume Variance
-given actual sales volume, how much different should profit be?
Sales Volume Variance Formula:
sales volume Variance change in quantity * budgeted unit CM
Flexible Budget Variance
difference between Actual profit and Flexible budget profit
Next Step of Variance Analysis:
spit the Flexible budget Variance into three components
Sales Price Variance
Variance between Actual Revenue and Flexible budget Revenue
Sales price variance=
difference in sales price
Fixed Cost Variance
difference between Actual and bugeted Fixed costs
Variable Cost Variacne
when variable Cost differs from Flexible budget
What causes variable price variance?
-price of input was different than expected (not SALES price, but price of MATERIAL)
Variable Cost variance=
price Variance + quantity Variance
Specific Cost Variances to know
Materials purchase price variance
based on purchase price
Materials Quantity (efficiency) varinace
based on quantity used in production
Rate paid versus Rate budgeted at the Actual number of hours
hours used versus hours budgeted at the standard Rate
How to determine if favorable or unfavorable
difference for If It is a Cost or sales price
we can trace deviations to specific people
Who Cares about these specific components of variances?
What might cause a labor rate variance?
possibly inefficient use of higher paid workers
- inexperienced workers, poor supervision
What might cause a labor efficiency variance?
Probably due to normal variations in production or demand
... a change in demand
Small but recurring sales volume variance indicates...
Small but recurring materials quantity variance indicates...
... machine degrading (problem in manufacturing process)
could be due to a Permanent change in the Operating environment (ex reduce price per unit)
are people padding the budget?
Other recurring variances, question to consider:
unfavorable sales price Variance
When to consider a price cut:
When to consider using cheaper materials along with price cut
-unfavorable sales price variance , favorable sales volume variance (same two factors from last card, when JUST to consider a price cute)
Padding the Budget:
What tactics are illegal
big bath and channel stuffing (violate matching Principal)
-when manager knows he/she won't make budget for the year
to increase sales