1. © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

2. © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
CHAPTER 15
Budgetary Control
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

3. Learning Objectives
What is budgetary control and why it is important in the overall performance management process?
How is a flexible budget different from a master budget?
What are the key variances that companies identify when analyzing flexible budget results?
How are variances interpreted?
How does a company utilize variance information to provide better cost control?
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

4. What Is Budgetary Control?
Ensuring that actual financial results are in line with targets
Feedback: investigating variations between actual results and budgeted results and taking appropriate corrective action
A favourable variance (F) occurs where income exceeds budget and/or expenses are lower than budget.
An unfavourable variance (U) occurs where income is less than budget and/or expenses are greater than budget
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

5. Actual versus Budget Financial Report
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

6. Flexible Budgeting
Budgeted or Standard costs per unit are applied to the actual level of business activity
Flexible budgets provide a better basis for investigating variances, because the volume of production may differ from that planned
Flexible budgets take into account variations in the volume of activity
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

7. Variance Analysis
Comparing actual performance against plan, investigating the causes of the variance and taking corrective action to ensure that targets are achieved when:
The variance is significant in terms of absolute dollar value and/or percentage
The variance will likely occur again
The cause of the variance is not easily identifiable
The variance can be controlled through changes made to production processes, supplier selection processes, product-mix planning, marketing efforts, or other changes to the organization’s operational plans and strategies
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

8. Variance Analysis Types of variances
1. Sales variances: price and quantity variances
2. Direct material variances: price and efficiency variances
3. Labour variances: rate and efficiency variances
4. Overhead variances: variable spending and efficiency variances, and fixed spending and production volume variances
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

9. Variance Analysis - Example
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

10. Variance Analysis - Example
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

11. Variance Analysis - Example
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

12. Sales Variance
Sales price variance is the difference between the actual price and the standard price for the actual quantity sold
9,000 x $5 = $45,000 F
Sales quantity variance is the difference between the budget and actual quantity sold at the budgeted selling price
1,000 x $17 = $170,000 U
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

13. © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
Cost Variances
Each cost variance, for materials, labour, and overhead, can be split into two types
A flexible budget variance
The difference between the actual costs and the costs determined by the flexible budget
A volume variance
The difference between the flexible budget and the master budget
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

14. © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
Cost Variances
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

15. Price and Efficiency Variances
Price variances (also called rate or spending variances)
Occur because the cost per unit of resources is higher or lower than the standard cost
Efficiency variances (also called usage variances)
Occur because the actual quantity of materials, labour, or machine hours used is higher or lower than a company planned to use in the production process
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

16. Price and Efficiency Variances
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

17. Materials Price Variances
Direct Materials Price Variances
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

18. Materials Efficiency Variances
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

19. Labour Rate Variances
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

20. Labour Efficiency Variances
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

21. Variable Overhead Spending Variance
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

22. Variable Overhead Efficiency Variance
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

23. Summary of Variances
Total Materials Variance Efficiency $5,000 U Price ,800 F Total $2,200 U
Total Labour Variance Efficiency $7,500 U Rate 13,750 U Total $21,250 U
Total Variable Overhead Variance Efficiency $5,000 U Spending 8,250 U Total $13,250 U
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

24. Fixed Overhead Spending Variance
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

25. Fixed Overhead Production Volume Variance
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

26. Understanding Variances
Efficiency variances
Poor productivity
Poor production planning
Out-of-date bill of materials or labour routing
Poor quality material that requires greater skill to work
The availability of labour with the right skills
Price variances
Changes in supplier prices not yet reflected in the bill of materials
A negotiated wage increase that has not been included in the labour routing
Poor purchasing practices
Unplanned overtime
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

27. Cost Control
Reducing costs while maintaining the same levels of productivity or maintaining costs while increasing levels of productivity
Through economies of scale or efficiencies in producing goods or services
Considered as cost improvement
Cost improvement needs to be exercised by all budget holders to ensure that limited resources are effectively utilized and budgets are not overspent
Can also be exercised by undertaking a review of horizontal business process
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15

28. Conclusion Flexible Budgets Variance Analysis
Sales price and quantity variances
Price and efficiency variances
Direct materials price variance
Direct materials efficiency variance
Direct labour rate variance
Direct labour efficiency variance
Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead spending variance
Fixed production volume variance
Cost control
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 15