Chapter_9_Presentation_Study_Aid_Slides

Variance Analysis Cycle

  • Conceptual framework for understanding variances and their implications on budget and performance.

Characteristics of Flexible Budgets – Part 1

  • Planning Budgets: Prepared for a single, planned level of activity.

  • Performance Evaluation: Difficult when actual activity differs from planned levels.

Characteristics of Flexible Budgets – Part 2

  • Adaptability: Flexible budgets can be prepared for any activity level within the relevant range.

  • Comparison: Show costs incurred at actual levels of activity for effective comparisons.

  • Cost Control: Aids managers in controlling expenses and improving performance evaluations.

Larry’s Lawn Service Overview

  • Business Model: Lawn care service focused on consistent lawn sizes in a planned community.

  • Budget Planning: Larry based his June budget on mowing 500 lawns, reflecting his assessment of business activity.

Deficiencies of the Static Planning Budget – Part 1

  • Static budgets do not adjust for actual activity levels, leading to inaccuracies in financial assessments.

Deficiencies of the Static Planning Budget – Part 2

  • Larry’s Planning Budget: Outline of expected expenditures and revenues without accommodating variance.

Deficiencies of the Static Planning Budget – Part 3

  • Larry’s Actual Results: Highlights discrepancies between planned and actual performance metrics.

Deficiencies of the Static Planning Budget – Part 4

  • Comparison of actual results against planning budget highlights potential financial mismanagement.

Understanding Variances

  • Favorable Variance: Occurs when actual costs are less than budgeted costs; indicates efficient cost management.

  • Unfavorable Variance: Occurs when actual costs exceed budgeted costs; points to inefficiencies.

Deficiencies of the Static Planning Budget – Part 5

  • Need to analyze how variances affect operational efficiency and financial outcomes.

Deficiencies of the Static Planning Budget – Part 6

  • To effectively assess cost control, understanding the context of activity levels is essential.

Deficiencies of the Static Planning Budget – Part 7

  • Challenge: High actual activity level may inflate costs regardless of managerial efficiency.

Deficiencies of the Static Planning Budget – Part 8

  • Key question: Determine proportion of cost variance attributable to activity level versus cost control.

How a Flexible Budget Works – Part 1

  • Flexing a Budget: Requires recognizing relationships between variable and fixed costs.

    • Total variable costs vary with activity level.

    • Total fixed costs remain consistent within the relevant range.

Flexible Budget Preparation

  • Larry’s Flexible Budget: Created based on mowing an estimated number of lawns; guides financial planning.

Quick Check 1

  • Wages and Salaries Calculation: For 600 lawns, total cost derived from fixed and variable components.

Activity Variances – Part 1

  • Definition: Arises from differences in actual activity versus planned levels.

Activity Variances – Part 2

  • Applying flexible budgeting concepts to assess Larry’s business performance.

Activity Variances – Part 3

  • Comparison between flexible budget and planning budget provides insights into financial health.

Activity Variances – Part 4

  • Insights: Revenue and activity increases may lead to greater net operating income due to fixed cost structure.

Key Terminology

  • Revenue Variance: Difference between actual and flexible budget revenues.

  • Spending Variance: Difference between actual and flexible budget costs.

Revenue and Spending Variances – Part 1

  • Applying flexible budgeting concepts for variance assessment.

Revenue and Spending Variances – Part 2

  • Favorable Revenue Variance: $1,750 difference indicating better-than-expected revenue.

Revenue and Spending Variances – Part 3

  • Analysis of spending variances based on flexible budget compared to actual results.

Performance Report Combining Activity and Revenue and Spending Variances – Part 1

  • Recognizes importance of tracking financial performance through combined reports.

Performance Report Combining Activity and Revenue and Spending Variances – Part 2

  • Effective reporting includes variations from both activity and budget planning.

Performance Report Combining Activity and Revenue and Spending Variances – Part 3

  • Breakdown of variance calculations for clearer financial performance insights.

Performance Report Combining Activity and Revenue and Spending Variances – Part 4

  • Example calculation: Actual revenue compared against budgeted, highlighting variance effects.

Performance Reports in Non-Profit Organizations

  • Non-profits may consist of diverse revenue sources aside from product sales: tuition, state funding, donations.

Performance Reports in Cost Centers

  • Cost center reports track expenses; do not include revenue or net operating income variances.

Planning and Flexible Budgets with Multiple Cost Drivers – Part 1

  • Acknowledgment of multiple factors influencing cost; enhances budget accuracy.

Planning and Flexible Budgets with Multiple Cost Drivers – Part 2

  • Incorporation of additional cost drivers into budgeting reflects real operational complexities.

Planning and Flexible Budgets with Multiple Cost Drivers – Part 3

  • Updated planning budget accommodates multiple drivers to provide clearer financial forecasts.

Planning and Flexible Budgets with Multiple Cost Drivers – Part 4

  • Adjusted flexible budgets that account for varying lawn care specifics to improve operational insights.

A Performance Report with Multiple Cost Drivers

  • Comprehensive performance reports illustrate the impact of multiple factors on overall business efficiency.