Power point for budget of flexible budget variances

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Power point for budget of flexible budget variances

After you enable Flash, refresh this page and the presentation should play. Get the plugin now. Toggle navigation. Help Preferences Sign up Log in. To view this presentation, you'll need to allow Flash. Click to allow Flash After you enable Flash, refresh this page and the presentation should play. View by Category Toggle navigation. Products Sold on our sister site CrystalGraphics. Price and Efficiency Variances The maintenance department did not properly maintain machines.

Tags: budgets control flexible machines management sales variances yard. Latest Highest Rated. This chapter focuses on how budgets specifically flexible budgets can be used to evaluate feedback on variances and aid managers in their control function.

It is based on the level of output planned at the start of the budget period. The master budget is an example of a static budget. Budgeted variable costs per suit are as follows Direct materials cost 65 Direct manufacturing labor 26 Variable manufacturing overhead 24 Total variable costs 5 Static Budget Budgeted selling price is per suit.

Fixed manufacturing costs are expected to bewithin a relevant range between 9, and 13, suits. Variable and fixed period costs are ignored in this example.

The static budget for year is based on selling 13, suits. What is the static-budget operating income? Revenues 10, 1, Less Expenses Variable 10, 1, FixedActual operating income8 Static-Budget Variance A static-budget variance is the difference between an actual result and a budgeted amount in the static budget.After you enable Flash, refresh this page and the presentation should play.

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power point for budget of flexible budget variances

Toggle navigation. Help Preferences Sign up Log in. To view this presentation, you'll need to allow Flash. Click to allow Flash After you enable Flash, refresh this page and the presentation should play. View by Category Toggle navigation.

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Products Sold on our sister site CrystalGraphics. Tags: budgets chapter control flexible management pound pumpkin variances. Latest Highest Rated. Title: Chapter 7: Flexible Budgets, Variances, and Management Control: I 1 Chapter 7 Flexible Budgets, Variances, and Management Control I The use of Planning for Control 2 Basic Concepts Variance difference between an actual and an expected budgeted amount Management by Exception the practice of focusing attention on areas not operating as expected budgeted Static budget a budget prepared for only one level of activity It is based on the level of output planned at the start of the budget period.

The master budget is an example of a static budget. Flexible budget revenues or costs considered justified by the actual output level of the budget period A key difference between a flexible budget and a static budget is the use of the actual output level in the flexible budget.

In general, flexible budgets can also be conditioned on actual levels of other external influences serve to implement responsibility accounting 3 Basic Concepts Static-Budget Variance Level 0 the difference between the actual result and the corresponding static budget amount Favorable Variance F has the effect of increasing operating income relative to the budget amount Unfavorable Variance U has the effect of decreasing operating income relative to the budget amount 4 Variances Variances may start out at the top with a Level 0 variance the difference between actual and static-budget operating income Answers How much were we off?

Levels 1, 2, and 3 examine the Level 0 variance into progressively more-detailed levels of analysis Answers Where and why were we off? Direct Materials and Direct Labor will be handled next.

power point for budget of flexible budget variances

Overhead Variances are discussed in detail in a later chapter Both Direct Materials and Direct Labor have both Price and Efficiency Variances, and their formulae are the same 11 Remark The above split-up has been derived by introducing the flexible budget between static budget and actual values static budget variance level 1 budgeted of units budgeted per unit actual of units budgeted per unit actual of units budgeted per unit actual of units actual per unit Flexible budget variance Sales volume variance Flex.

Variance F Sales volume variance U 10 13 Formally, a similar split-up could have been derived by developing a flexible budget 2 as follows static budget variance level 1 budgeted of units budgeted per unit budgeted of units actual per unit budgeted of units actual per unit actual of units actual per unit Flex. A standard cost is a carefully predetermined cost that is based on a norm of efficiency. Standard costs can relate to units of inputs or units of outputs Standard input allowed for one output unit Standard cost per input unit 14 Cost budgeting, procedure Efficiency is the relative amount of inputs used to achieve a given level of output.

Performance evaluation should not be based on Variances alone If any single performance measure, such as a labor efficiency variance, receives excessive emphasis, managers tend to make decisions that maximize their own reported performance in terms of that single performance measure what you measure is what you get.Always indicate whether a variance is favorable or unfavorable.

A variance is usually considered favorable if it improves net income and unfavorable if it decreases income. Therefore, when actual revenues exceed budgeted amounts, the resulting variance is favorable. When actual revenues fall short of budgeted amounts, the variance is unfavorable. On the other hand, when actual expenses exceed budgeted expenses, the resulting variance is unfavorable; when actual expenses fall short of budgeted expenses, the variance is favorable. Accountants usually express favorable variances as positive numbers and unfavorable variances as negative numbers.

However, some accountants and managerial accounting textbooks avoid expressing any variance values as negative but always notate whether a variance is favorable or unfavorable. Still other accountants and textbooks call variances positive when the actual amount exceeds budget and negative when the actual amount falls short of budget. Here, a positive variance for sales would be favorable because sales were higher than expected. However, a positive variance for costs would be unfavorable because costs were higher than expected hurting net income.

Express variances as positive when they are favorable to income and negative when they are unfavorable to income. Even so, take special care to indicate whether each variance is favorable or unfavorable to net income.

Management should investigate the cause of significant budget variances. Here are some possibilities:. The quality of management: Special care to reduce costs can result in favorable variances. On the other hand, management carelessness can drive up unfavorable variances. Lousy budgeting: An unrealistically ambitious budget is likely to cause negative variances.

Cost-cutting measures reflected in a favorable variance may actually hurt the quality of finished products. Senior managers may have preferred that the company had spent more for better materials and sold higher-quality goods.

Many managers use a system called management by exception. They investigate the largest variances, whether favorable or unfavorable, and ignore the rest. This strategy helps focus managers on potential problem areas in operations. Mark P. He has taught accounting at the college level for 17 years and runs the Accountinator website at www. How to Deal with Budget Variances.

About the Book Author Mark P.A flexible budget adjusts to changes in actual revenue levels. Actual revenues or other activity measures are entered into the flexible budget once an accounting period has been completed, and it generates a budget that is specific to the inputs. The budget is then compared to actual expenses for control purposes. The steps needed to construct a flexible budget are:. Identify all fixed costs and segregate them in the budget model. Determine the extent to which all variable costs change as activity measures change.

Enter actual activity measures into the model after an accounting period has been completed. This updates the variable costs in the flexible budget.

Enter the resulting flexible budget for the completed period into the accounting system for comparison to actual expenses. This approach varies from the more common static budgetwhich contains nothing but fixed amounts that do not vary with actual revenue levels. Budget versus actual reports under a flexible budget tend to yield variances that are much more relevant than those generated under a static budget, since both the budgeted and actual expenses are based on the same activity measure.

This means that the variances will likely be smaller than under a static budget, and will also be highly actionable. A flexible budget can be created that ranges in level of sophistication. Here are several variations on the concept:. Basic flexible budget. At its simplest, the flexible budget alters those expenses that vary directly with revenues. There is typically a percentage built into the model that is multiplied by actual revenues to arrive at what expenses should be at a stated revenue level.

In the case of the cost of goods solda cost per unit may be used, rather than a percentage of sales. Intermediate flexible budget. Some expenditures vary with other activity measures than revenue.

For example, telephone expenses may vary with changes in headcount. If so, one can integrate these other activity measures into the flexible budget model.A budget to actual variance analysis is a process by which a company's budget is compared to actual results and the reasons for the variance are interpreted.

The purpose of all variance analysis is to provoke questions such as:. Most organizations perform variance analysis on a periodic basis i.

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For example, expenses may have come in higher than planned, but that produces a negative variance to profit. In addition, variances are relative to an organization's key performance indicators KPIs. If the organization utilizes a driver-based, flexible budget or plan where production costs come in higher in a period due to increased sales volume, than that may have a positive effect on organizational profit and show that in the budget to actual variance analysis.

Most variance analysis is performed on spreadsheets Excel using some type of template that's modified from period to period.

Flexible Budget and Performance Analysis

Most enterprise systems have some type of standard variable reporting capability, but they often do not have the flexibility and functionality that spreadsheets provide. You can never go wrong with a classic. And by adding some conditional formatting as in the screenshot below, you can more quickly identify where areas of opportunity lie.

Download Excel File. Taking the classic variance analysis one step further, an analyst can compare actuals to the period immediately prior and to the same period the prior year. As a side note, it's good practice to write notes on the variances directly on the variance analysis to the right of the data, as in the screenshot below.

Probably not. Lastly, don't just settle for an answer. A key for the arrows, and which are associated with favorable or negative variance, and quick explanation of them should be included with this example. Get instant access to video lessons taught by experienced investment bankers. Login Self-Study Courses.

Public Boot Camps. Corporate Training. Technical Skills. View all Recent Articles.Characteristics of Flexible Budgets May be prepared for any activity level in the relevant range. Show costs that should have been incurred at the actual level of activity, enabling apples to apples cost comparisons. Help managers control costs.

Improve performance evaluation. Deficiencies of the Static Planning Budget Larrys Larrys Lawn Lawn Service Service provides provides lawn lawn care care in in aa planned planned community community where where all all lawns lawns are are approximately approximately the the same same size.

power point for budget of flexible budget variances

At At the the end end of of May, May, Larry Larry prepared prepared his his June June budget budget based based on on mowing mowing lawns.

Since Since all all of of the the lawns lawns are are similar similar in in size, size, Larry Larry felt felt that that the the number number of of lawns lawns mowed mowed in in aa month month would would be be the the best best way way to to measure measure overall overall activity activity for for his his business. Since these variances are unfavorable, has Larry done a poor job controlling costs?

Since these variances are favorable, has Larry done a good job controlling costs? How How much much of of the the cost cost variances variances is is due due to to higher higher activity, activity, and and how how much much is is due due to to cost cost control?

To To answer answer the the question, question, we we must must the the budget budget to to the the actual actual level level of of activity activity. The differences between the budget amounts are called activity variances.

Flexible Budgets, Variances, and Management Control: I - PowerPoint PPT Presentation

Flexible Budgets with Multiple Cost Drivers More than one cost driver may be needed to adequately explain all of the costs in an organization. The cost formulas used to prepare a flexible budget can be adjusted to recognize multiple cost drivers.

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Flexible Budgets with Multiple Cost Drivers Because Because of of the the large large unfavorable unfavorable wages wages and and salaries salaries spending spending variance, variance, Larry Larry decided decided to to add add an an additional additional cost cost driver driver for for wages wages and and salaries. The The variance variance is is due due primarily primarily to to the the number number of of hours hours required required for for the the additional additional edging edging and and trimming.

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So So Larry Larry estimates estimates the the additional additional hours hours and and builds builds those those hours hours into into both both his his revenue revenue and and expense expense budget budget formulas. Some Common Errors The The most most common common errors errors in in preparing preparing performance performance reports reports are are to to implicitly implicitly assume assume that: that: 1.

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All All costs costs are are fixed fixed or that that 2. All All costs costs are are variable. Learn more about Scribd Membership Home. Read Free For 30 Days. Much more than documents. Discover everything Scribd has to offer, including books and audiobooks from major publishers.

power point for budget of flexible budget variances

Start Free Trial Cancel anytime. Flexible Budget and Performance Analysis. Uploaded by ttzaxsan. Date uploaded Dec 15, Did you find this document useful? Is this content inappropriate? Report this Document.The previous chapter provided a comprehensive budget illustration using a static budget.

The static budget is one that is developed for a single level of activity. It is very useful for planning and control purposes.

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However, there is a potential shortcoming in using static budgets for performance evaluation. Specifically, when the actual output varies from the anticipated level, variances are likely to arise. These variances can be quite misleading.

How to Deal with Budget Variances

The genesis of the problem is that variable costs will tend to track volume. If the company produces and sells more products than anticipated, one would expect to see more variable costs and vice versa. Presumably, it is a good thing to produce and sell more than planned, but the variances resulting from the higher costs can appear as a bad thing! The opposite occurs when volume is less than anticipated. July of 20X9 was hotter than usual, and Mooster found itself actually producinggallons.

Does this mean the production manager has done a poor job in controlling costs? Remember that actual production volume exceeded plan. At a glance, it is challenging to reach any conclusion.

The flexible budget reveals a much different picture. On balance, it appears that the production manager has done a good job. This could be due to using more labor hours, paying a higher labor rate per hour, or some combination thereof.

Example Flexible Budgeting - Managerial Accounting - CMA exam - CPA exam BEC - Ch 23 p 2

The flexible budget responds to changes in activity and generally provides a better tool for performance evaluation. It is driven by the expected cost behavior. Fixed factory overhead is the same no matter the activity level, and variable costs are a direct function of observed activity. When performance evaluation is to be based on a static budget, there is very little incentive to drive sales and production above anticipated levels because increases in volume would tend to produce more costs and unfavorable variances.

The flexible budget-based performance evaluation is a remedy for this phenomenon. While this tool is useful for performance evaluation, it does little to aid advance planning. But, flexible budgets can also be useful planning tools if prepared in advance. These fluctuations will be very important to managers as they plan daily staffing and purchases of milk and cream to support the manufacturing operation.

The following flexible budget reveals the expected aggregate expense levels. In reality, supporting flexible budget documents would resemble the comprehensive budget documents portrayed in the prior chapter.

Such comprehensive documents would provide the information necessary to manage the smallest of operating details that must be adjusted as production volumes fluctuate. It perhaps goes without saying that computers are extremely helpful in preparing budget information that is easily flexed for changes in volume.

Businesses save millions of dollars in accounting time by relying on computers to aid budget preparation. But, this savings is inconsequential when compared to the production efficiency and inventory savings that results from using computerized flexible budgeting tools. The net result is that the supply chain is immediately adjusted to match raw material orders to actual production needs, thereby eliminating billions of dollars of raw material waste and scrap.

Flexible Budgets.


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