ACCT 302 Ch7

Variance

The difference between an actual and an expected (budgeted) amount.

Favorable Variance

A variance that increases operating income relative to the budgeted (expected) amount.

Unfavorable Variance

A variance that decreases operating income relative to the budgeted (expected) amount.

Management by Exception

The practice of focusing attention on areas not operating as expected and less closely on areas that are.

Static (Master) Budget

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

Static Budget Variance

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

Flexible Budget

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

Sales-Volume Variance

The variance that compares static and flexible budgets based on actual sales performance.

Price Variance

The difference between an actual input price and a budgeted input price multiplied by the actual input quantity.

Efficiency Variance

The difference between the actual input quantity used and the budgeted input quantity for the actual output, multiplied by the budgeted price.

Direct Materials Variance

The calculation of variances related to direct material prices and efficiency.

Responsibility for Materials Variances

Materials Price Variance is the responsibility of the purchasing manager, while Materials Efficiency Variance is the responsibility of the production manager.

Labor Variances Summary

Price Variance = Actual Hours (AR - SR) and Efficiency Variance = SR x (AH - SHA).