Flexible Budgets, Standard Costs, and Variance Analysis
Chapter 7: Flexible Budgets vs. Static Budgets
A static budget is based on a planned production level at the beginning of the budget period. A flexible budget is adjusted to recognize the level of actual output for the budget period. Flexible budgets provide a more accurate perception of the causes of variations than static budgets.
Developing a Flexible Budget
Managers can use a three-step procedure to develop a flexible budget. When all costs are variable or fixed, these three steps require only information about the budgeted selling price, the budgeted variable cost per unit of production, fixed costs budgeted, and the actual number of units produced.
Standard Costs: Purpose and Application
A standard cost is a cost carefully determined based on efficient operations. The purpose of the standard is to exclude the inefficiencies of the past and to take into account changes in the budget period.
Calculating Price and Efficiency Variances
Calculating price and efficiency variances helps managers better understand two aspects of performance that are different but not independent. The price variance focuses on the difference between the actual price and the budgeted price. The efficiency variance focuses on the difference between the actual quantities of input and the budgeted input.
Using Variances for Performance Evaluation
Managers use variances to evaluate performance, for organizational learning, and for continuous improvement. When used for these purposes, people consider numerous variations on the whole rather than focusing only on individual variations.
Activity-Based Costing and Variance Analysis
The analysis of variances could assign costs by activity (such as preparation) to better understand why activity costs differ from budgeted costs in the static or flexible budget.
Benchmarking: Definition and Usefulness
Benchmarking is the ongoing process of comparing the performance level of products in manufacturing and services, as well as the implementation of activities, with the highest levels of performance achieved in the best competing companies or in those with similar processes.
Chapter 8: Planning Overhead Costs
Planning fixed costs, both direct and indirect, involves learning only activities that add value and then being efficient to perform these activities. The key difference for planning variable costs is that progressive decisions taken during the budget period should play a much greater role than planning fixed costs, which are taken long before the period.
Why Companies Use Standard Cost Systems
In a cost object, the cost standard tracks the direct costs by multiplying the standard price or rates established by standard input for the actual production and allocates indirect costs based on the standard overhead rate multiplied by the standard amounts of allocation bases established for the actual output produced.
Calculating Variable Overhead Variances
If the flexible budget is developed for variable overhead, it is possible to calculate an efficiency variance of indirect costs and a budget variance of overhead.
Efficiency Variance Comparison
The efficiency variance for variable overhead is not similar to the efficiency variance for a direct cost item. The variable overhead efficiency variance indicates whether using more or less of an allocation base cost per unit of production included in the flexible budget. The efficiency variance for a cost item indicates that a varying amount of input per unit of production of that part of the direct cost than included in the flexible budget.