BEC 2 Planning Techniques Budgeting and Analysis Flashcards Preview

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Flashcards in BEC 2 Planning Techniques Budgeting and Analysis Deck (63)
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Budget variance analysis

Comparison of actual results to the annual business plan is the first and most basic level of control and evaluation of operations.


Budget variance analysis
Performance report

- Actual results may be easily compared to budgeted results.
- Usefulness is limited by the existence of variance from budget that may be strictly related to volume.


Use of flexible budgets to analyze performance

allows mangers to identify how an individual change in a cost of revenue driver affects the overall cost of a process


Variance analysis using standards

1. Standard costing systems
- direct costs- Standard price x Standard quantity = Standard direct costs
- indirect costs - Standard application rate x Standard quantity = Standard indirect costs
2. Purpose of Standard costing systems
- cost control
- data for performance evaluations
- ability to learn form standards and improve various processes


Variance calculations using standards

1. Standard cost objectives
2. Evaluating variances from standard
- evaluating results: favorable or unfavorable
- evaluating control: controllable or uncontrollable variance
3. Product costs subject to variance analysis


Direct materials and direct labor variance

a price variance x a quantity variance


Direct material variance

actual quantity purchased x (Actual price - standard price)


Direct material quantity usage variance

standard price x (actual quantity used - standard quantity allowed)


Direct labor rate variance

Actual hours worked x (actual rate - standard rate)


Direct labor efficiency variance

Standard rate x (Actual hours worked - Standard hours allowed)


Manufacturing overhead variance

The analysis of manufacturing overhead is the analysis of the debit or credit balance in the overhead account. A net debit balance (under applied) is an unfavorable variance and a net credit balance (over applied) is a favorable variance.


Overhead variance models

1. Net overhead variance - net debt or credit balance in the overhead account
2. Two way variance
- budget controllable variance
- volume uncontrollable variance
3. Three way variance
- spending variance
- efficiency variance
- volume uncontrollable variance


Establishing overhead application rates

overhead rates are applied using various cost drivers that assign the components of overhead cost pools to production. Predetermined fixed and variable overhead rates are established by dividing planned fixed and variable overhead amounts by a suitable cost driver.


Application of overhead

overhead is applied to production based on the predetermined rate per cost driver times the standard cost driver allowed for the actual level of activity.


When standard costing is used, the application of overhead is accomplished in two steps:

1. Calculated overhead rate = budgeted overhead costs / Estimated cost driver

2. Applied overhead = Standard cost driver for actual level of activity x Overhead rate (step 1)


Sales and contribution margin variance

Sales and contribution margin variance analyses can be used to evaluate the effectiveness of an entity's identification of target markets and its strategies to capture those markets.


Sales price variance

measures the aggregate impact of a selling price different from budget
Sales price variance = ((actual SP/Unit)-(Budgeted SP/Unit)) x Actual sold units


Strategy and mission

Firms may reduce prices in an effort to move into a cost leadership strategy or increase prices in an effort to put a differentiation strategy into place. Variance results have specific implications in analyzing the effectiveness of the firm in reaching its target markets.



a favorable variance in price and market share may exhibit untapped profit potential for a firm. If a firm plans to increase its market share or sales volume simply by reducing sales prices, it may risk reducing the profitability of the firm.


Sales volume variance

a flexible budget variance that distills volume activity from other sales performance components. The sales volume concept can be refined to include analysis of sales mix, market share and selling price.

Sales volume variance =
(Actual sold units - Budgeted sales units) - Standard contribution margin per unit


Sales Mix Variance

evaluates the impact of the company's departure from the planned mix of products anticipated by its budget.
Sales mix variance =
(Actual product sales mix ratio- Budgeted product sales mix ratio) x Actual sold units x Budgeted contribution margin per unit of that product


Sales quantity variance

measures the change in the number of actual sold units from those budgeted and can be expanded to include analysis of the anticipated size of the market and the share of the target market.
Product sales quantity variance = (Actual sold units of product - Budgeted sales units of product0 x Budgeted product sales mix ratio x Budgeted contribution margin per unit of that product


Market size Variance

measures of the effect the size of the entire market for the product has on the contribution margin
Market size variance = (Actual market size - Expected market size) x Budgeted market share x Budgeted contribution margin per unit


Market share variance

market share variance = (actual market share - budgeted market share) x actual units x budgeted contribution margin per unit


Analysis of business performance - Financial Scorecards

Financial scorecards take many forms, including budget vs actual and other variance reports, as well as overall analysis of business performance.
Financial performance is often a function of organizational decisions and the performance objectives given to each segment.


Types of responsibility segments (scorecards)

strategic business units are generally classified around four financial measures for which managers may be held accountable.
Highly effective in organizing performance requirements and in establishing accountability for financial responsibility:
1. Cost
2. Revenue
3. Profit
4. Investment


Establishing design for financial scorecards

1. Accurate and timely
2. Understandable
3. Specific accountability
a. Product lines
b. Geographic areas
c. Customers


Accounting decisions - allocation of common costs

managers have control over variable costs and over controllable fixed costs. Performance evaluations dealing with controllable margins will factor in these costs.
Common costs are not controllable. Approaches to the rational allocation of central administrative costs must be understood by responsible mangers and must be fair and logical to motivate employees that common costs do not represent an arbitrary burden.


Analysis of business performance - Contribution reporting

Profit SBUs are normally responsible for generating a level of profit in relation to controllable costs. Contribution reporting formats are generally used to clearly show the degree to which the profit that strategic business units have generated has covered variable or controllable costs.
A. Contribution margin - measures the excess of revenues over variable costs
B. Controllable margin - refinement of contribution margin reporting and represents the difference between contribution margin and controllable fixed costs. Controllable fixed costs are those costs that managers can impact in less than one year


Balanced scorecard

gathers info on multiple dimensions of an organization's performance defined by critical success factors necessary to accomplish firm strategy. Critical success factors are classified as:
1. Financial
2. Internal business process
3. Customer satisfaction
4. Advancement of innovation and human resource development