Variances Short summary Static Budgets A static budget ( master budget) is prepared for only one level of a given type of activity. All actual results are compared with the original budgeted amounts, even if sales volume is more or less than originally planned. Master Budget Variance: Sales The variances of actual results from the master budget are called master (static) budget variances. Master Budget Variance: Expenses Actual expenses that exceed budgeted expenses result in unfavorable expense variances. Actual expenses that are less than budgeted expenses result in favorable expense variances. Flexible Budget A flexible budget (variable budget) is a budget that adjusts for changes in sales volume and other cost-driver activities. Flexible Budget Formulas To develop a flexible budget, managers determine revenue and cost behavior (within the relevant range) with respect to cost drivers. Evaluation of Financial Performance Flexible budget for actual sales activity Units 7,000 Sales $217,000 Variable costs 152,600 Contribution margin $ 64,400 Fixed costs 70,000 Operating income $ (5,600) Master budget Salesactivity variances 9,000 $279,000 196,200 $ 82,800 70,000 $ 12,800 2,000 U $62,000 U 43,600 F $18,400 U – $18,400 U Total master budget variances = $11,570 + $12,800 = $24,370 Isolating the Causes of Variances Effectiveness is the degree to which a goal, objective, or target is met. Efficiency is the degree to which inputs are used in relation to a given level of outputs. Performance may be effective, efficient, both, or neither. Flexible-Budget Variances Total flexible-budget variance = Total actual results – Total flexible-budget planned results Actual results $(11,570) Flexible budget $(5,600) $5,970 Unfavorable Flexible-budget variances Sales-Activity Variances Total sales-activity variance = Actual sales unit – Master budgeted sales units × Budgeted contribution margin per unit Sales price and Sales Volume Variances SPV = (Act. Sale Price – Exp. Sale Price) X Act. Sales Volume Sales prices fluctuations cause variance: The sales-price variances arises because a company increased or decreased its sales price when compared with the budgeted sales price. Volume fluctuations cause variance: The sales-volume variance, which arises from an increase or decrease in units sold. SVV = (Act. Sales Vol. – Bud. Sale Vol.) X Unit Contribution Margin Variances from Material and Labor Standards Standard Direct-Materials Cost Allowed: Units of good output achieved × Input allowed per unit of output × Standard unit price of input = Flexible budget or total standard cost allowed Price and Usage Variances (Actual price – Standard Price) × Actual quantity (Actual quantity – Standard quantity) × Standard price Variable-Overhead Efficiency Variance When actual cost-driver activity differs from the standard amount allowed for the actual output achieved, a variable-overhead efficiency variance will occur. Variable-Overhead Spending Variance This is the difference between the actual variable overhead and the amount of variable overhead budgeted for the actual level of cost-driver activity. Variable Overhead Variances Actual Variable Overhead Incurred Flexible Budget for Variable Overhead at Actual Hours Flexible Budget for Variable Overhead at Standard Hours AH × AR AH × SVR SH × SVR Spending Variance Efficiency Variance Spending variance = AH(AR - SVR) Efficiency variance = SVR(AH - SH) Fixed Overhead Variances Actual Fixed Overhead Incurred Fixed Overhead Budget Fixed Overhead Applied cost driver × predet.overhead rate Budget Variance Volume Variance Predetermined FOVH= Budgeted Fixed OVH/ normal activity level of cost driver Cost driver = units produced, direct labor hours, machine hours etc.