Chapter 7 - Flexible Budgets, Direct-Cost Variances, and Management Control

These flashcards cover key terms and concepts related to flexible budgets, variances, and management control as described in Chapter 7.

Variance

The difference between actual results and expected (budgeted) performance.

Management by Exception

The practice of focusing attention on areas not operating as expected (budgeted).

Static Budget

A budget based on the level of output planned at the start of the budget period.

Static Budget Variance (Level 1)

The difference between the actual result and the corresponding static budget amount.

Favorable Variance (F)

A variance that increases operating income relative to the budget amount.

Unfavorable Variance (U)

A variance that decreases operating income relative to the budget amount.

Sales-Volume Variance

The difference between the static budget and the flexible budget, arising from the difference between actual and budgeted volume.

Flexible Budget

A budget that calculates budgeted revenues and costs based on actual output in the budget period.

Standard Costing

A costing system that uses predetermined costs for direct materials and direct labor.

Price Variance Formula

(Actual price of input – budgeted price of input) X actual quantity of input.

Efficiency Variance Formula

(Actual quantity of input used – budgeted quantity allowed for actual output) X budgeted price of input.

Direct Materials Variance

Differences in expected vs actual costs of raw materials.

Direct Labor Variance

Differences in expected vs actual costs of labor.

Benchmarking

The continuous process of comparing performance levels against the best levels of performance in competing companies.