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Chapter 12

COMM-2016EL Chapter Notes - Chapter 12: Cost Driver, Financial Statement, European Cooperation In Science And Technology

Commerce and Administration
Course Code
Kayla Levesque

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Chapter Fleile Budgets & Variane Analsis
Flexible Budgets: The Bridge Between Static Budgets & Actual Results
Static Budget is another name for the master budget. All master budgets are static or inflexible, because even
though they may be easily revised, the budgets assume fixed levels of activity
All actual results would be compared with the original budgeted amounts, even though, for example,
sales volume turned out to be only 7,000 units instead of an originally planned 9,000 units
Performance Report is a generic term that usually means a comparison of actual results with a budget…
A helpful performance report with include variances that direct upper-management’s attention to
significant deviations from expected results
Master (Static) Budget Variances the variances of actual results from the master budget
Favourable Variances - actual revenues that exceed expected revenues
Unfavourable Variances - budgeted revenues that exceed actual revenues
Flexible Budget a budget that adjusts for changes in sales volume and other cost-driver activities
The flexible budget is identical to the master budget in format, and managers may prepare it for any level of
activity after the actual level of activity is known
When month-end sales turn out to be 7,000 units instead of 9,000, for example, managers can prepare a
new flexible budget based on this new cost-driver level
We can then see what the total variable expenses should be based on the new sales level and compare
this amount to the actual result
The flexible budget is based on the same assumptions of revenue and cost behaviour, within the relevant range,
as the master budget… Cost behaviour is illustrated by cost functions or flexible-budget formulas. The flexible
budge incorporates how each cost and revenue is affected by changes in a single cost driver’s activity
Activity-Based Flexible Budget a budget based on costs for each activity centre and cost driver at varying
volumes of activity
These budgets provide more detailed measures of cost behaviour, and should be used when a significant
portion of a company’s costs varies with cost drivers other than units of production
There are 2 reasons why actual results might differ from the master budget:
1. Sales and cost-driver activities were not the same as originally forecast
2. Revenues and variable costs per unit of activity, and fixed costs per period, were not as expected
The intent of using a flexible budget for performance evaluation is to isolate varied, significant effects on actual
results that can be corrected if adverse, or enhanced if beneficial
Because the flexible budget is prepared at ACTUAL levels of activity, any variances between the
flexible budget and actual results cannot be due to activity levels
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Budget Variances and Their Causes
Effectiveness the degree to which a goal, objective, or target is met (doing the right things)
Efficiency the degree to which minimum inputs are used to produce a given level of outputs (doing the right
things right)
Performance may be effective, efficient, both, or neither…
Flexible-Budget (Efficiency) Variances differences between the flexible budget and the actual results
(must be due to departures of actual costs or revenues from flexible-budget formula amounts)
The less input used to produce a given output, the more efficient the operation
Total Flexible-Budget Variance = Total Actual Results Total Flexible Budget
*HINT! If the term “budget” is in the variance, then you calculate the variance by taking the difference
between the “budget” (either static or flexible) and the “actual” results*
Do not conclude automatically that favourable flexible-budget variances are good, and unfavourable flexible-
budget variances are bad. Instead, interpret all variances as signals that the actual operations have not
occurred exactly as anticipated when the flexible-budget formulas were set
Activity-Level (Sales-Volume) Variances differences between the flexible budget and the master/static
budget amounts, which measure how effective managers have bene in meeting the planned sales objective
(must be due to activity levels, not cost control)
A Market-Share Variance assumes the market or industry sales volume is on budget, but that the volume
variance was due to a change in the companys share of total industry sales
A Market-Size Variance assumes that the company’s share as a percentage of the total market is on target, and
then attributes the sales-volume variance to the change in the market sales volume
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