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Lecture 8

# ADM 3346 Lecture Notes - Lecture 8: Cost Driver, Pro Forma

Department
Course Code
Professor
Tiemei L I
Lecture
8

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Chapter 7, 8 &16 - Variance Analysis
Learning Objectives
Q1. Develop flexible budgets, and calculate flexible budget Level 2 and Level 3
variances for direct manufacturing costs
Q2. Distinguish between Levels 3 and 4 variance analyses for substitutable inputs, and
calculate Level 4 direct mix and yield variances
Q3. Overhead cost variance analyses
Q4. Undertake variance analysis in activity-based costing systems
Q5. Profitability variance analyses
Standard Costs
Organizations set standards to help plan operations.
A standard cost is the expected cost of providing the group or service.
In manufacturing, the standard cost of a unit of output is comprised of:
The standard price of the input, and
The standard quality of the input expected to be consumed in the production of
one output unit
Variance
Variance
The difference between actual (realized) and budgeted (pro forma) results
A favourable variance results in operating income that exceeds the budgeted
amount
An unfavourable variance results in operating income that is less than the
budgeted amount
Variance analysis
Discovering why actual results failed to meet expectations (i.e. are greater or less
than budget)
Q1. Develop flexible budgets, and calculate flexible budget Level 2 and Level 3 variances for
direct manufacturing costs
Q2. Distinguish between Levels 3 and 4 variance analyses for substitutable inputs, and calculate
Level 4 direct mix and yield variances
Static and Flexible Budgets
Static (Master) budget
Based on one level of output
Is not altered after it is issued even if circumstances change
Static budget variance
The difference between the actual result and the corresponding static budget
amount
Flexible budget
A budget which is adjusted for changes in the actual level of output or
actual revenue and cost drivers

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Allows for more meaningful comparisons between (adjusted) budget and
actual results
Levels 0 and 1 Variance Analysis
Level 0 variance analysis
The highest level of analysis, with no detail
The difference between actual and static budget operating income
Level 1 variance analysis
shows which line-items led to the total Level 0 variance

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Developing a Flexible Budget
A flexible budget is developed using alternative levels of output units sold
Direct Manufacturing Cost Variances
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