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.