Lecture 6: Budgeting and Variance Analysis Flashcards
(29 cards)
What is a budget?
detailed plan for the acquisition and use of financial and other resources over a specified period of time.
What is budgeting?
processes of preparing budgets.
What are the three different types of budgets?
- Operating budgets
- Financial budgets
- Master budgers
What are operating budgets?
plans for all phases of operations, including production, purchasing, personnel and marketing budgets
What are financial budgets?
Identify sources and uses of funds for budgeted operations and capital expenditures
What are master budgets?
omprehensive expression of operating and financial plans for a future time period (usually one year) summarized in a set of budgeted financial statements.
What are the 6 budgeting and control cycle steps?
- Create master budget and sub budgets
- Get manager buy-in
- Analyze current performance versus expectations
- Examine variations
- Take corrective action
- Obtain feedback and revise plan
What is variance analysis?
Analysis of predetermined ‘standard’ plan with Actual performance. Through a series of steps it accounts for the difference between standard and actual performance.
What are standard costs?
- Budgeted unit costs based on carefully predetermined amounts, grounded in historical data and task analysis
- Used for planning labor and material requirements as expected levels of performance.
- Serve as benchmarks for measuring performance.
What are the two types of variance?
- Sales volume variance: changes in profitability due to changes in volume
- Flexible budget variance: change in profitability due to changes in prices/costs
Name the two sales volume factors?
- Market size variance
- Market share variance
What are the three price/cost factors?
- Sales price variance
- Direct material variance
- Direct labor variance
How do you calculate sales price variance?
Sales price variance = (Actual price – Planned price) * Actual Quantity sold
How do you calculate direct materials variance and direct labor variance?
Sales price variance = (Actual price – Planned price) * Actual Quantity sold
What are the two key insights in Materials variance analysis?
- Lower input prices lead to increases in profitability
- Lower material usage efficiency lead to decreases in profitability
How do you calculate materials price and materials efficiency variance?
- Materials price variance = (Actual Price – Standard price) * Actual Quantity
- Materials efficiency variance = (Actual Quantity – Standard Quantity) * Standard Price
What are the two key insights in labor variance analysis?
- Higher wages lead to decreases in profitability
- Higher labor efficiency lead to increases in profitability
How do you calculate labor price and efficiency variance?
- Labor price variance: (Actual wage – Standard wage) * Actual Labor Hours
- Labor efficiency variance: (Actual labor hours – Standard hours) * Planned wage
What is the standard price?
amount that should have been paid for resource acquired
What is the standard or budgeted quantity?
quantity of input allowed for the actual output units achieved
Name two reasons for favorable material price variance and unfavorable mateiral efficiency variance?
- Substandard quality of materials caused waste in production process
- Tension between production and purchasing manager
Name one reason for unfavorable labor price variance and favorable labor efficiency variance?
- More skilled workers are more expensive but also work more efficiently.
What is market size variance? And how do you calculate it?
how much of unexpected profitability is due to changes in the size of the market?
Market size variance: (Actual market size – planned market size) * Planned % of market share * Planned contribution margin
What is the key insight of market size variance?
smaller than expected market leads to decrease in profitability
