Taha Wael Qandeel
Cost Accounting II
Chapter 1
Flexible Budgets, Direct-Cost Variances, and Management Control
Variance: difference between actual results and expected (budgeted/planned) performance.
Uses of Variances:
Variances assist managers in implementing their strategies by enabling management by
exception.
* Management by exception: the practice of focusing attention on areas not operating as
expected (budgeted).
 Enable managers to focus their efforts on the most critical areas and also used in
performance evaluation and to motivate managers.
 Managers take corrective actions to ensure that decisions are implemented correctly
and that previously budgeted results are attained.
Level 1 Static Budgets and Static-Budget Variances
(Between Static budget and Actual result)
A static budget: is based on the level of output planned at the start of the budget period
The static-budget variance: is the difference between the actual result and the corresponding
budgeted amount in the static budget.
NOTES:
Favorable variances has the effect of operating income (Positively). ‫ليس شرط ان يكون موجب‬
Unfavorable variances has the effect of operating income (Negatively).‫ليس شرط ان يكون سالب‬
Revenue/Profit
Cost
operating income
operating income
vice versa
vice versa
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Taha Wael Qandeel
Cost Accounting II
Level 2 Flexible Budgets
1. (Flexible budget variances) (Between Flexible budget and Actual result)
2. (Sales volume variances) (Between Flexible budget and Static budget)
 The only difference between the static budget and the flexible budget is that the static
budget is prepared for the planned output planned at the begging of the period, whereas
the flexible budget is based on the actual output at the end.
 If we have to assess the performance of the manager, we prefer the flexible budget.
1- Sales-Volume Variances
The sales-volume variance is the difference between the static budget for the number of units
expected to be sold and the flexible budget for the number of units that were actually sold.
The original
method
Contribution
margin
2- Flexible budget variances
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Taha Wael Qandeel
Cost Accounting II
a) Selling price variance:
The flexible-budget variance for revenues is called the selling-price variance
because it arises solely from the difference between the actual selling price and the
budgeted selling price
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Taha Wael Qandeel
Cost Accounting II
Level 3 Price Variances and Efficiency Variances for Direct-Cost Inputs
This level helps managers to better understand past performance and take
corrective actions to implement superior strategies in the future.
To calculate price and efficiency variances , the company needs to obtain budgeted
input prices and budgeted input quantities
Three main sources for this information are past data, data from similar
companies, and standards
A standard is a carefully determined price, cost, or quantity that is used as a benchmark for
judging performance. Standards are usually expressed on a per-unit basis.
 A standard input is a carefully determined quantity of input—such as square yards of cloth or
direct manufacturing labor-hours—required for one unit of output, such as a jacket
 A standard price is a carefully determined price that a company expects to pay for a unit of
input
 A standard cost is a carefully determined cost of a unit of output
A price variance is the difference between actual price and budgeted price, multiplied
by actual input quantity, such as direct materials purchased or used.
An efficiency variance is the difference between actual input quantity used—such as
square yards of cloth of direct materials—and budgeted input quantity allowed for
actual output, multiplied by budgeted price
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Taha Wael Qandeel
Cost Accounting II
Journal Entries Using Standard Costs
 Favorable variances are credits; unfavorable variances are debits
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