Budgeting and Variance Analysis Terms

Budget

A plan for the future expressed in quantitative terms. (p. 354)

Cash budget

A schedule estimating how cash will be acquired and used over a specific time period. (p. 356)

Control

The process of gathering feedback to ensure a plan is being properly executed or modified as circumstances change. (p. 354)

Direct labor budget

A plan showing the direct labor-hours required to fulfill the production budget. (p. 366)

Direct materials budget

A plan showing the amount of raw materials that must be purchased to fulfill the production budget and provide adequate inventories. (p. 364)

Ending finished goods inventory budget

A budget showing the dollar amount of unsold finished goods inventory appearing on the ending balance sheet. (p. 368)

Manufacturing overhead budget

A plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period. (p. 367)

Master budget

A number of separate but interdependent budgets quantifying the company's sales, production, and financial goals and culminating in a cash budget, budgeted income statement, and budgeted balance sheet. (p. 355)

Merchandise purchases budget

A plan used by a merchandising company showing the amount of goods to be purchased from suppliers during the period. (p. 364)

Participative budget

See Self-imposed budget. (p. 354)

Planning

The process of establishing goals and specifying how to achieve them. (p. 354)

Production budget

A plan showing the number of units that must be produced during a period to satisfy both sales and inventory needs. (p. 363)

Sales budget

A schedule showing expected sales in dollars and units. (p. 355)

Self-imposed budget

A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by higher-level managers, and any issues are resolved by mutual agreement. (p. 354)

Selling and administrative expense budget

A schedule of planned nonmanufacturing expenses. (p. 368)

Activity variance

The difference between the amount of revenue or expense in the flexible budget and the planning budget. It is caused solely by the difference between the actual and planned levels of activity. (p. 411)

Flexible budget

A budget showing what revenues and costs should have been, given the actual level of activity. (p. 406)

Management by exception

A management system that compares actual results to a budget so significant deviations can be flagged as exceptions and investigated. (p. 405)

Planning budget

A budget created before the period begins that is valid only for the planned level of activity. (p. 406)

Revenue variance

The difference between the actual amount of revenue and how much it should have been, given the actual level of activity. A favorable (unfavorable) revenue variance occurs because the revenue is higher (lower) than expected, given the actual level of activity. (p. 411)

Spending variance

The difference between the actual amount of a cost and how much it should have been, given the actual level of activity. A favorable (unfavorable) spending variance occurs because the cost is lower (higher) than expected, given the actual level of activity. (p. 412)

Labor efficiency variance

The difference between the actual labor-hours taken to complete a task and the standard hours allowed for the actual output, multiplied by the standard hourly labor rate. (p. 449)

Labor rate variance

The difference between the actual hourly labor rate and the standard rate, multiplied by the actual hours worked. (p. 449)

Materials price variance

The difference between a direct material's actual price per unit and its standard price per unit, multiplied by the quantity purchased.

Materials quantity variance

The difference between the actual quantity of materials used in production and the standard quantity allowed for the actual output, multiplied by the standard price per unit.

Price variance

A variance computed by taking the difference between the actual price and the standard price and multiplying the result by the actual quantity of the input.

Quantity variance

A variance computed by taking the difference between the actual quantity of the input used and the amount of the input that should have been used for the actual level of output and multiplying the result by the standard price of the input.

Standard cost card

A detailed listing of the standard amounts of inputs and their costs required to produce one unit of a specific product.

Standard cost per unit

The standard quantity allowed of an input per unit of a specific product, multiplied by the standard price of the input.

Standard hours allowed

The time that should have been taken to complete the period's output. It is computed by multiplying the actual number of units produced by the standard hours per unit.

Standard hours per unit

The amount of direct labor time allowed to complete a single unit of product, including allowances for breaks, machine downtime, cleanup, rejects, and other normal inefficiencies.

Standard price per unit

The price that should be paid for each unit of direct materials. It should reflect the final delivered cost of those materials.

Standard quantity allowed

The amount of direct materials that should have been used to complete the period's actual output. It is computed by multiplying the actual number of units produced by the standard quantity per unit.

Standard quantity per unit

The amount of direct materials allowed for each unit of finished product, including an allowance for normal inefficiencies, such as scrap and spoilage.

Standard rate per hour

The labor rate allowed per hour of labor time, including employment taxes and fringe benefits.

Variable overhead efficiency variance

The difference between the actual level of activity and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate.

Variable overhead rate variance

The difference between the actual variable overhead cost incurred and the standard cost allowed for the actual activity.