Chapter 8 Notes
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This 4 page Class Notes was uploaded by Kaitlyn West on Sunday March 29, 2015. The Class Notes belongs to BUS-A 202/207 at Indiana University taught by Geoffrey Sprinkle in Winter2015. Since its upload, it has received 54 views.
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Date Created: 03/29/15
Chapter 8 Budgetary Control and Variance Analysis A Variance Analysis a technique rms use to determine Why actual revenues costs and pro t differ from the budgeted amounts 1 Helps organizations determine whether their employees and processes are performing as expected I Budgets as the Basis for Control A A good plan lays the foundation for effective control B The following assumptions are often necessary Raw Materials Quantities Raw Materials Prices Labor Requirements Wage Rate Variable Overhead Fixed Costs C Master Budget a plan that represents the expected revenues costs and pro t corresponding to the expected sales volume as of the beginning of that period ll How to Calculate Variances 1 Variance the difference between an actual result and a budgeted amount a Favorable F variance performance exceeded expectations i Denoted by positive numbers b Unfavorable U variance performance fell short of expectations i Denoted by negative numbers 2 Total Pro t Variance Actual Pro t Master Budget Pro t A Flexible Budget 1 Decomposes the total pro t variance into the sales volume variance and the exible budget variance 2 Fexing the master budget changes total budgeted revenues and costs to correspond to the actual sales level 3 Flexible Budget the budget at the actual sales vmume a Any pro t difference between the master and exible budgets is due solely to the difference between budgeted and actual sales 4 Sales Volume Variance the difference in pro t between the master and exible budgets OWU39lbULJNl l a Sales Volume Variance Flexible Budget Pro t Master Budget Pro t b Individual revenue and cost components of the sales volume variance are neither favorable nor unfavorable 5 Flexible Budget Variance difference in pro t between actual and exible budget results a Flexible Budget Variance Actual Pro t Flexible Budget Pro t B Components of the Flexible Budget Variance 1 Sales Price Variance Actual Revenue Flexible Budget Revenue 2 Fixed Cost Spending Variance Budgeted Fixed Costs Actual Fixed Costs 3 Variable Cost Variances a Differences in raw materials direct labor and variable overhead between the actual and exible budgets should not be attributed to changes in sales volume C lnput Quantity and Price Variances 1 Flexible Budget Cost Budgeted InputUnit Actual Sales QuantityBudgeted Cost per Unit of the Input 2 To separate the effects of input quantity vs input price we introduce an quotas ifquot budget a Actual input quantities with prices in the master budget 3 Input Price Variance difference between the quotas ifquot budget and actual results a If Actual lnput Price gt Budgeted lnput Price Unf 4 Input Quantity Variance difference between amounts in the exible budget and the quotas ifquot budget a If Actual Quantity gt Flexible Budget Quantity Unf 0 b AKA the quotInput Ef ciency Variancequot ll Interpreting and Using Variances 1 Budget Reconciliation Report provides management with a summary that bridges actual and expected performance a Helps pinpoint which areas to investigate to take corrective action and highlights success stories 2 Variances could arise a During normal operations b Because of a more permanent change in the rm s operating environment c Because budgets or standards are too tight or tooloose A General Rules for Analyzing Variances 1 Investigate All Large Variances a Large variances could signal a permanent change in the operating environment b When changes have longterm implications it is important to understand their cause 2 Trends in Variance a Trends often point to inherent problems i May indicate developing problems in a business process that can be xed before becoming a serious issue b Trends also arise due to biases that in uence setting of standards 3 Linking Variances Consider the Big Picture a Step back and see how the variances are connected to each other b Changing the sales price often affects the sales vmume c Focusing on cheap raw materials may cause unfavorable variances in other business processes d Revenue and cost variances sometimes have the same underlying cause B Making Control Decisions in Response to Variables 1 Firms should use all of the variances to investigate the validity of underlying budget assumptions and targets a Then they should collect additional information to choose among explanations so they can decide on corrective actions 2 For multiproduct rms an additional variance caed quotSales Mix Variancequot comes into play C Non nancial Controls a Limitations of variance analysis pertain to timeliness and speci city b Financial measures are aggregate so non nancial measures can be of greater use 1 Non nancial Measures and Process Control a Provide immediate and speci c feedback to employees about the status of the environment and outcomes of their decisions b Nature of the information needed differs depending on the type of job and organization C Process Control Charts are used to help employees track performance on a realtime basis i Help ensure that corrective action is obvious Critical Success Factors like quality and customer satisfaction are vital to achieving the firm s strategy Non nancial Measure Variance Actual Value Budgeted Amount 2 Non nancial Measures and Aligning Goals b Provide ongoing feedback to employers and evaluate them Financial controls are more useful for evaluating managers at higher levels in organizational hierarchy Non nancial controls are more useful for evaluating lower level employees
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