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.