Class 17: Budgeting and Variance Analysis
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23 Terms
1
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Budget Variances
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A difference between a budgeted amount and the _____________ is called a variance
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A difference between a budgeted amount and the _____________ is called a variance
actual result
2
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Budget Variances
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The two primary benefits provided by budgeting are to aid _________ and __________
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The two primary benefits provided by budgeting are to aid _________ and __________
planning and control
3
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Budget Variances
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Variance analysis is primarily a tool to aid __________
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Variance analysis necessarily takes place after-the-fact
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Variance analysis is primarily a tool to aid __________
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Variance analysis necessarily takes place after-the-fact
control
4
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Budget Variances
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It can identify actions to be taken to avoid additional unfavorable variances on an ___________ (to control the firm’s performance)
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It can identify actions to be taken to avoid additional unfavorable variances on an ___________ (to control the firm’s performance)
ongoing basis
5
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Budget Variances
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It is used to evaluate the _______________ of business units and their managers (those who control the firm)
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It is used to evaluate the _______________ of business units and their managers (those who control the firm)
performance
6
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Differences in Business Unit Budgets
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In a _____________, managers are accountable for costs only (i.e. the unit does not generate revenue)
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e.g. accounting department, legal department
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In a _____________, managers are accountable for costs only (i.e. the unit does not generate revenue)
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e.g. accounting department, legal department
cost center
7
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Differences in Business Unit Budgets
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In a ________________, managers are accountable primarily for revenues (i.e. costs are immaterial)
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e.g. regional sales manager
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In a ________________, managers are accountable primarily for revenues (i.e. costs are immaterial)
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e.g. regional sales manager
revenue center
8
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Differences in Business Unit Budgets
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In a ____________, managers are accountable for both revenues and costs
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e.g. brand manager (responsible for all brand products)
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In a ____________, managers are accountable for both revenues and costs
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e.g. brand manager (responsible for all brand products)
profit center
9
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Differences in Business Unit Budgets
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Operating budgets will vary by ______
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Operating budgets will vary by ______
type of center
10
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Analyzing Variances
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Managers will only investigate budget variances that are _____________
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“Management by exception”
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Managers will only investigate budget variances that are _____________
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“Management by exception”
relatively large
11
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Analyzing Variances
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For business units where the costs or revenues are _______________, they assume operations are under control
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For business units where the costs or revenues are _______________, they assume operations are under control
close to budget
12
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Analyzing Variances
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However, if the variance is relatively large, they will __________________ of the variance
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Generally create a ***decision rule*** for variance investigation, either a percentage or dollar amount
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However, if the variance is relatively large, they will __________________ of the variance
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Generally create a ***decision rule*** for variance investigation, either a percentage or dollar amount
investigate the cause
13
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Favorable and Unfavorable Variances
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A favorable variance is one that causes operating income to be ________ than budgeted
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i.e., when actual revenues are higher or actual expenses are lower than the budgeted amount
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A favorable variance is one that causes operating income to be ________ than budgeted
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i.e., when actual revenues are higher or actual expenses are lower than the budgeted amount
higher
14
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Favorable and Unfavorable Variances
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An unfavorable variance is one that causes operating income to be _______ than budgeted
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An unfavorable variance is one that causes operating income to be _______ than budgeted
lower
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Favorable and Unfavorable Variances
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Revenue variances are pretty straightforward:
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favorable is almost always ____, unfavorable is ___
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Revenue variances are pretty straightforward:
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favorable is almost always ____, unfavorable is ___
good;
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bad
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bad
16
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Favorable and Unfavorable Variances
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_________ variances are more complicated
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If R&D costs are over budget, is that necessarily bad?
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If materials costs are lower, is that necessarily good?
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_________ variances are more complicated
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If R&D costs are over budget, is that necessarily bad?
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If materials costs are lower, is that necessarily good?
Expense
17
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Disaggregating Production Expenses
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The total variance for a production expense is the difference between the ____________
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The total variance for a production expense is the difference between the ____________
budget and the actual costs
18
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Disaggregating Production Expenses
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_____________: The portion that results from actual sales volume differing from budgeted volume
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_____________: The portion that results from actual sales volume differing from budgeted volume
Volume variance
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Disaggregating Production Expenses
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_______________: The portion caused by paying a different price for each unit of raw material or hour of labor than had been anticipated in the budget
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_______________: The portion caused by paying a different price for each unit of raw material or hour of labor than had been anticipated in the budget
Price variance
20
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Disaggregating Production Expenses
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_________________: The portion that results from using more raw materials or labor for each unit produced than had been anticipated in the budget
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_________________: The portion that results from using more raw materials or labor for each unit produced than had been anticipated in the budget
Quantity Variance
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Volume, Price, & Quantity Variances
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A favorable _________________ means that the (likely variable) expense item is lower than budgeted (in total dollars) because sales volume is lower than budgeted
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Likely culprit: declining product demand
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Expense variances are complicated
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A favorable _________________ means that the (likely variable) expense item is lower than budgeted (in total dollars) because sales volume is lower than budgeted
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Likely culprit: declining product demand
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Expense variances are complicated
volume variance
22
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Volume, Price, & Quantity Variances
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An unfavorable _______________ means you’re paying higher prices per unit than anticipated
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Possible increase in raw materials cost (no control)
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Possible poor negotiating with suppliers or employees
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An unfavorable _______________ means you’re paying higher prices per unit than anticipated
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Possible increase in raw materials cost (no control)
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Possible poor negotiating with suppliers or employees
price variance
23
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Volume, Price, & Quantity Variances
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An unfavorable _______________ means costs are higher because production inputs are unexpectedly high
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Indication of poor manufacturing efficiency
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An unfavorable _______________ means costs are higher because production inputs are unexpectedly high
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Indication of poor manufacturing efficiency
quantity variance