CHAPTER7FlexibleBudgets,Direct-CostVariances,andManagementControl

Chapter7learningobjectivesUnderstandstaticbudgetsandstatic-budgetvariancesExaminetheconceptofaflexiblebudgetandlearnhowtodevelopitCalculateflexible-budgetvariancesandsales-volumevariancesExplainwhystandardcostsareoftenusedinvarianceanalysisCopyright?2015PearsonEducation7-2

Chapter7learningobjectives,concludedComputepricevariancesandefficiencyvariancesfordirect-costcategories.UnderstandhowmanagersusevariancesDescribebenchmarkingandexplainitsroleincostmanagementCopyright?2015PearsonEducation7-3

BasicConceptsVariance—differencebetweenactualresultsandexpected(budgeted)performance.Managementbyexception—thepracticeoffocusingattentiononareasnotoperatingasexpected(budgeted).Static(master)budgetisbasedontheoutputplannedatthestartofthebudgetperiod.Copyright?2015PearsonEducation7-4

BasicConceptsStatic-budgetvariance—thedifferencebetweentheactualresultandthecorrespondingstaticbudgetamountFavorablevariance(F)—hastheeffectofincreasingoperatingincomerelativetothebudgetamountUnfavorablevariance(U)—hastheeffectofdecreasingoperatingincomerelativetothebudgetamountCopyright?2015PearsonEducation7-5

VariancesVariancesmaystartout“atthetop”withaLevel0analysis.Thisisthehighestlevelofanalysis,asuper-macroviewofoperatingresults.TheLevel0analysisisnothingmorethanthedifferencebetweenactualandstatic-budgetoperatingincome.Copyright?2015PearsonEducation7-6

VariancesFurtheranalysisdecomposes(breaksdown)theLevel0analysisintoprogressivelysmallerandsmallercomponents.Answers:“Howmuchwereweoff?”Levels1,2,and3examinetheLevel0varianceintoprogressivelymore-detailedlevelsofanalysis.Answers:“Whereandwhywereweoff?”Copyright?2015PearsonEducation7-7

EvaluationLevel0tellstheuserverylittleotherth