Variance Analysis (3) Flashcards
How can revisions to the budget or standard cost be manipulated?
In such a way as to make operating results seem much better than is really the case
What should be done to prevent manipulation in budgetting?
There should be strict rules about revising a budget or standard cost
What should the revision to the budget or standard cost be ideally based on?
Independent evidence (and verifiable evidnece) that operational managers are not in a position to manipulate
Evidence of change in total size of the market for the company’s product?
Ideally be independent evidence from an external source
Evidence of change in market price for materials?
Should ideally be an official price index or price benchmark for the material item
Evidence of change in standard material usage for a product?
Should ideally be evidenced by a documented change in product specification
Advantages of revising the budget (controllable)
Highlights those variances which are controllable and those which are not
Advantages of revising the budget (operational performance)
Ensures that operational performance is appraised by reference to realistic targets
Advantages of revising the budget (future budgets)
Should ensure that future budgets are more realistic
Disadvantages of revising the budget (determination)
Determination of revised budget may be biased or may need external information
Disadvantages of revising the budget (undermine)
Use of revised budget may undermine original budget as a target and as a motivator
Disadvantages of revising the budget (operating problems)
Employees may use this system to their advantage by excusing operationg problems as poor planning if this method is used
When should a budget only be revised?
For items that are beyond the control of the organisation
Should budgets be revised for operational issues?
No
What variances do total material price variance contain
Material price planning variance
Material price operational variance
