Lecture 9 Slides with Solutions to Practice Exercises

Management Accounting Overview

• Course: ACC5040 Semester 1 – 2024/25

• Lecture: 9

• Topics Covered: Standard Costing and Variance Analysis

• Instructor: Dr. Sarah G. Mohamed (Email: Sarah.Mohamed@bcu.ac.uk)

Session’s Agenda

1. Recap on the Budgeting Process

2. Compare Static to Flexible Budgets

3. Discuss Level 1 & 2 Variance Analyses

1. Recap on Budgeting Process

Budget Defined

• Budget: Quantitative expression of a proposed plan of action by management for a specified period.

• Purpose: Coordinates actions needed to implement the plan.

• Components: May include financial and non-financial data.

Budgeting Process

• Preparation of a Master Budget is the focus.

• Components of Master Budget:

  • Operating (Production) Budget: Building blocks leading to the budgeted income statement.

  • Financial Budget: Building blocks based on the operating budget, leading to the budgeted balance sheet and cash flow statement.

The Operating (Production) Budget

• Key Components:

  • Materials Budget

  • Labor Budget

  • Factory Overhead Budget

  • SG&A Budget

  • Sales Budget

  • Cost of Goods Sold Budget (Schedules 2-7)

  • R&D/Design, Marketing, Distribution Costs Budgets

  • Budgeted Income Statement

  • Financial Budgets: Cash, Balance Sheet, and Cash Flows

2. Static vs. Flexible Budget

Static Budget

• Definition: Master Budget based on a fixed output level determined at the beginning; does not change irrespective of actual production levels.

• Calculation: Static Budget = Budgeted unit cost/price x Budgeted output level.

Flexible Budget

• Definition: Adjusts revenue and costs based on actual output during the budget period.

• Calculation: Flexible Budget = Budgeted unit cost/price x Actual output level.

Exercises and Variance Analysis

Exercise 1: Kriger Fencing Company

• Static Budget Variance Calculation:

  • Formula: Static budget variance = Actual income – Static budget income

  • Static Budget Results: Actual income £15,000 vs. Static Budget £100,000; Total Variance = £85,000 Unfavorable

Flexible Budget Calculation

• Key Data:

  • Budgeted selling price: £625,000/12,500 = £50 per unit

  • Budgeted variable cost: £300,000/12,500 = £24 per unit

Level 1 Variance Analysis

• Definition: Difference between actual results and fully budgeted data.

• Example: Static budget income = £1,900 vs. Actual = £6,800; Total Variance = £4,900 Favorable.

Level 2 Variance Analysis

• Decomposes Level 1 variance into flexible (price) budget variance and sales volume variance.

• Questions Addressed: “Why did this go wrong?”

• Flexible Budget Variance Formula: Flexible budget variance = AO x (AP − BP)

• Sales Volume Variance Formula: Sales volume variance = BP (AO − BO)

Variances Classification

• Favorable (F): Actual revenues/costs exceed expectations.

• Unfavorable (U): Actual revenues/costs fall short of expectations.

Exercises

• Exercise questions related to calculating variances and flexible budgets based on actual and budgeted results.

3. Level 1 & 2 Variance Analyses

Variance Analysis

• A measure of performance that highlights the differences between actual results and budgeted amounts.

• Example Calculations:

  • Level 1 Variance: Actual income £6,800 vs. Static income £1,900; Variance = £4,900 Favorable.

  • Level 2 Variance would outline reasons behind Level 1 differences.