Slide AKT202 Chapter 7

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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 (Master) Budget – is based on the}

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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}

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Variances

_{Variances may start out “at the top” with a}

Level 0 analysis.

_{This is the highest level of analysis, a}

super-macro view of operating results.

_{The Level 0 analysis is nothing more than the}

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Variances

_{Further analysis decomposes (breaks down)}

the Level 0 analysis down into progressively smaller and smaller components

Answers: “How much were we off?”

_{Levels 1, 2, and 3 examine the Level 0}

variance into progressively more-detailed levels of analysis

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Evaluation

_{Level 0 tells the user very little other than}

how much Contribution Margin was off from budget.

Level 0 answers the question: “How much were we

off in total?”

_{Level 1 gives the user a little more}

information: it shows which line-items led to the total Level 0 variance.

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Flexible Budget

_{Flexible Budget – shifts budgeted revenues}

and costs up and down based actual operating results (activities)

_{Represents a blending of actual activities and}

budgeted dollar amounts

_{Will allow for preparation of Level 2 and 3}

variances

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Level 3 Variances

_{All Product Costs can have Level 3 Variances.}

Direct Materials and Direct Labor will be handled next. Overhead Variances are discussed in detail in a later chapter

_{Both Direct Materials and Direct Labor have}

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Level 3 Variances

Price Variance formula:

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Variances & Journal Entries

_{Each variance may be journalized} _{Each variance has its own account}

_{Favorable variances are credits; Unfavorable}

variances are debits

_{Variance accounts are generally closed into}

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Standard Costing

_{Budgeted amounts and rates are actually}

booked into the accounting system

_{These budgeted amounts contrast with actual}

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Standard Costing

_{Reasons for implementation:}

Improved software systems

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Management Uses of

Variances

_{To understand underlying causes of variances.} _{Recognition of inter-relatedness of variances} _{Performance Measurement}

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Activity-Based Costing and

Variances

_{ABC easily lends its to budgeting and variance}

analysis.

_{Budgeting is not conducted on the}

departmental-wide basis (or other macro approaches)

_{Instead, budgets are built from the bottom-up}

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Benchmarking and Variances

_{Benchmarking is the continuous process of}

comparing the levels of performance in

producing products & services against the best levels of performance in competing companies

_{Variances can be extended to include}

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