Flexible Budgets and Standard Costs

These flashcards cover key concepts about flexible budgets, standard costs, performance reports, variances, and related management practices.

What is a performance report?

A performance report shows budgeted amounts, actual amounts, and variances.

What is the difference between a fixed budget performance report and a flexible budget performance report?

A fixed budget performance report compares actual results with results expected under a fixed budget, while a flexible budget performance report compares actual performance and budgeted performance based on actual activity level.

What is a variance?

A variance is the difference between budgeted amounts and actual amounts.

When is a variance considered favorable?

A variance is favorable if it causes actual operating income to be higher than the budget.

What does a fixed budget performance report compare?

It compares actual results with the results expected under a fixed budget.

Why is comparing actual performance to the master budget often misleading?

It can be an 'apples-to-oranges' comparison if actual units sold differ from budgeted units sold.

What is Master Budget Variance?

Master Budget Variance equals Actual Amount minus Master Budget Amount.

What does the flexible budget variance measure?

The flexible budget variance indicates the amount of the Master Budget Variance due to causes other than volume differences.

What are ideal standards?

Ideal standards are based on perfect or ideal conditions and discourage inefficiencies.

What is a standard cost?

A standard cost is the budgeted cost for a single unit of product.

What is the formula for Direct Materials Price Variance?

DM Price Variance = (AP – SP) x AQ.

Who is generally responsible for the direct materials price variance?

The purchasing department.

What does the direct labor rate variance measure?

It measures the difference in hourly labor rates - actual vs. standard.

What are the two situations that could result in a favorable direct labor rate variance?

Using lower skilled workers or a decrease in fringe benefit costs.

What is the standard cost of Direct Labor?

Standard Quantity of DL per Unit of Product x Standard Price of DL per DL Hour.

What does a favorable direct materials quantity variance indicate?

AQ is less than SQ, indicating efficient use of materials.

What should companies do regarding standard costs?

Reassess standards at least once per year or when known cost changes occur.