Flexible Budgets and Direct Cost Variances

Flashcards covering key vocabulary related to flexible budgets and cost variances.

Variance Analysis

Comparative analysis between budget and actual results to investigate and address areas for improvement, serving as a performance evaluation tool.

Budget Variance

The difference between the budgeted amount of expense or revenue and the actual cost or revenue.

Favorable Variance (F)

Actual result of an account is better than the budget in relation to operating income (e.g., higher actual revenue, less direct materials used).

Unfavorable Variance (U)

Actual result of an account is worse than the budget in relation to operating income.

Flexible Budget

Provides a measure of the efficiency of a manager by assessing how well costs were controlled for the actual level of production.

Static Budget

Provides a measure of the effectiveness of a manager by assessing whether the manager accomplished their goals.

Static Budget Variance

The difference between a static budget (or original master budget) and the actual results.

Flexible Budget

Calculates budgeted revenues and budgeted costs based on actual output in the budget period, using original budgeted costs.

Flexible Budget Variances

Difference between actual results and flexible budget as a result of difference of pricing and inputs used.

Sales-Volume or Activity Variances

Difference between static budget and flexible budget as a result of difference of output quantity.

Controllable Costs

Costs whose level a manager or an individual can influence, ideally those for which managers are held accountable.

Standard

Benchmark, acceptable.

Standard Cost

"Should be" cost, predetermined, best estimate.

Standard Input or Standard Quantity (SQ)

Carefully determined quantity of input, such as yards of cloth or direct manufacturing labor hours, required for one unit of output.

Standard Price or Standard Rate (SR)

Carefully determined price the company expects to pay for a unit of input, such as a standard wage rate.

Standard Cost

Carefully determined cost of a unit of output.

Price Variance

The difference between actual and budgeted price.

Efficiency Variance

The difference between actual and budgeted quantities you purchased for a specific price.

Labor Rate Variance

(Actual price – budgeted price) × (actual hours).

Labor efficiency variance

(Actual hours – budgeted hours) × (standard rate).