Chapter7AccountingforcontrolManagementAccountingforDecisionMakersTenthEdition

LEARNINGOUTCOMESYoushouldbeableto:UndertakevarianceanalysisanddiscusspossiblereasonsforthevariancescalculatedDiscusstheroleandlimitationsofbudgetsforperformanceevaluationandcontrolDiscusstheissuesthatshouldbetakenintoaccountwhendesigninganeffectivesystemofbudgetarycontrolExplainthenature,roleandlimitationsofstandardcostingDiscussthebehaviouralissuessurroundingusingbudgetsandvariancestomonitorperformance

PreparebudgetsPerformandcollectinformationonactualperformanceIdentifyvariancesbetweenplanned(budgeted)andactualperformanceRespondtovariancesbetweenplannedandactualperformanceandexercisecontrolFigure7.1Thebudgetarycontrolprocess

PreparebudgetCollectinformationonactualperformancePerformCompareactualperformancewithbudgetandtakeactionondeviationsAdjustAdjustFeedbackFigure7.2Feedbackcontrol

PreparebudgetIdentifydeviationsbetweenbudgetandforecastactualoutcomePrepareforecastofactualoutcomeEvaluateresultsandtakeactionondeviationsAdjustAdjustFigure7.3Feedforwardcontrol

FlexiblebudgetsAmorevalidcomparisoncanbemadebetweenthebudget(usingtheflexedfigures)andtheactualresults.Originalbudget Flexedbudget ActualOutput(productionandsales)1,000units 900units900units￡ ￡ ￡Salesrevenue100,00090,00092,000Rawmaterials(40,000) (36,000)(36,000m)(36,900)(37,000m)Labour(20,000)(18,000)(2,250hr)(17,500)(2,150hr)Fixedoverheads(20,000)(20,000)(20,700)Operatingprofit20,00016,00016,900

equalsminusActualprofitplusAlladversevariancesAllfavourablevariancesBudgetedprofitFigure7.4Relationshipbetweenthebudgetedandactualprofit

SalesvariancesDifferencebetweenprofitshowninoriginalbudgetandprofitshowninfixedbudgetSalesvolume

varianceDifferencebetweenactualsalesandsalesshownintheflexedbudgetSalesprice

variance

Fi