Chapter 9: Flexible Budgets & Performance Analysis

What are budgets prepared to do?

Plan and Control

How do people use a budget?

As a reference point (benchmark) to evaluate actual performance

What are the comparisons among budgets called?

Variances

What do variances provides managers with?

• A basis for strategy evaluation

• Early warning of problems

• A basis for performance evaluation

Where can performance be benchmarked?

At various levels

What should managers be held responsible for?

Items and decisions they can significantly control

What can performance in relation to the budget impact?

Retention, promotion, bonus, etc.

What is Variance Analysis?

The comparison of budget expectations and actual performance

What is the purpose of variance analysis?

To evaluate and improve performance

What are the steps of the Variance Analysis Cycle?

1. Prepare performance report

2. Analyze variances

3. Raise questions

4. Identify root causes

5. Take actions

6. Conduct next period’s operations

What are variances labeled as?

Favorable or Unfavorable

What is a Favorable Variance?

Exceeded expected results (increased profit)

What is an Unfavorable Variance?

Did not meet expected results (decreases profit)

What makes a variance favorable for revenues?

Actual > Budget

What make a variance unfavorable for revenues?

Actual < Budget

What makes a variance favorable for expenses?

Actual < Budget

What makes a variance unfavorable for expenses?

Actual > Budget

What are all the terms used to reference a Master Budget?

• Planning Budget

• Static Budget

What is Profit Variance?

Master Budget Profit - Actual Profit

What is the goal of a variance analysis?

To explain any differences between the master budget profit and the actual profit

How do you explain the impact of the variables of price and quantity?

Need to hold one constant to find the impact of the other

What can you use to explain the impact of price and quantity?

Flexible Budget

Do fixed expenses stay the same on the flexible budget and the master budget?

Yes because they do not change with volume

What is multiplied together on the Master Budget?

Budget Quantity * Budget Price

What is multiplied together on the Flexible Budget?

Actual Quantity * Budget Price

What is multiplied together on the Actual Report?

Actual Quantity * Actual Price

What do Activity Variances compare?

• Master Budget

• Flexible Budget

What do Revenue/Spending Variances compare?

• Flexible Budget

• Actual Report

What varies in the Activity Variances?

Quantity

What varies in the Revenue/Spending Variances?

Price

How do you find Activity Variances?

(Budget Quantity - Actual Quantity) * Budget Price

What is Sales Volume Variances?

Total of all activity variances

What kind of question does Sales Volume Variance answer?

What is the impact to NOI if we sell 1 more/or 200 fewer goods?

How do you find Sales Volume Variances?

(Budget Quantity - Actual Quantity) * Budgeted Unit Contribution Margin

How do you find Sales Price Variance/Revenue Variance?

(Budget Price - Actual Price) * Actual Quantity

What kind of question does Sales Price Variance/Revenue Variance answer?

Using the actual activity (units), what is the impact to revenue if the actual selling price is different from what we expected?

What can cause a Sales Price Variance?

Thing that impact selling price:

• Price discounts

• Low quality products

• Price war with competition

How do you find Material/Labor/VMOH/VS&A Spending Variance (Variable Cost Spending Variance)?

(Budget Price - Actual Price) * Actual Quantity

What kind of question does Variable Cost Spending Variance answer?

Using the actual activity (units), what is the impact to variable costs if the actual cost is different from what we expected?

What can cause Variable Cost Spending Variances?

Anything that impacts variable costs

How do you find FMOH/FS&A Spending Variances (Fixed Cost Spending Variances)?

(Fixed Cost per Flexible Budget - Actual Fixed Cost)

What kind of question does Fixed Cost Spending Variance answer?

What is the impact to fixed costs if the actual cost is different from what we expected?

What is another way to calculate Fixed Cost Spending Variance?

By comparing the master budget to the actual budget

What can cause Fixed Cost Spending Variances?

Increases in utilities, new equipment, more security, etc.

What variances are a part of Activity Variances?

Sales volume variance

What variances are a part of Revenue/Spending Variances?

• Sales Price Variance

• Material Spending Variance

• Labor Spending Variance

• VMOH Spending Variance

• VS&A Spending Variance

• FC Spending Variance