1. Flexible Budgets and
Variance Analysis

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5. Favorable and Unfavorable Variances
Favorable variances arise when actual results exceed budgeted.
Unfavorable variances arise when actual results fall below budgeted.
Favorable (F) versus Unfavorable (U) Variances
Profit Revenue Costs
Actual > Expected F F U
Actual < Expected U U F

6. Static and Flexible Budgets
Learning
Objective 1
Static and Flexible Budgets
A static budget is prepared for only one level
of a given type of activity. Differences between
actual results and the static budget for level
of output achieved are static-budget variances.
A flexible budget (variable budget) adjusts
for different levels of activities. Differences
between actual results and the flexible
budget are flexible-budget variances.

7. Flexible Budget Formulas
Learning
Objective 2
Flexible Budget Formulas
To develop a flexible budget, managers
determine revenue and cost behavior
(within the relevant range) with
respect to cost drivers.
Note that the static budget is just
the flexible budget for a single
assumed level of activity.

8. Activity-Based Flexible Budget
Learning
Objective 3
Activity-Based Flexible Budget
An activity-based flexible budget
is based on budgeted costs for
each activity and related cost driver.
For each activity, costs
depend on an different cost driver.

9. Evaluation of Financial Performance
Learning
Objective 4
Evaluation of Financial Performance
Actual results may differ from
the master budget because...
1) sales and other cost-driver activities were
not the same as originally forecasted, or
2) revenue or variable costs per unit of activity and
fixed costs per period were not as expected.

10. Evaluation of Financial Performance
Actual results at actual activity level
(1)
Flexible budget for actual sales activity
(3)
Units , – , ,000U ,000
Sales Rs217, – Rs217,000 Rs62,000 U Rs279,000
Variable costs , ,670 U , ,600 F ,200
Contribution margin Rs 58,730 Rs 5,670 U Rs 64,400 Rs18,400 U Rs 82,800
Fixed costs , U , – ,000
Operating income Rs (11,570) Rs5,970 U Rs(5,600) Rs18,400 U Rs 12,800
Sales-Activity Variance
(4) = (3)–(5)
Flexible-budget variances
(2) = (1)-(3)
Static Budget
(5)

11. Isolating the Causes of Variances
Managers use comparisons among
actual results, master budgets,
and flexible budgets to evaluate
organizational performance.

12. Isolating the Causes of Variances
Effectiveness is the degree to which
a goal, objective, or target is met.
Efficiency is the degree to which inputs are
used in relation to a given level of outputs.
Performance may be effective,
efficient, both, or neither.

13. Flexible-Budget Variances
Learning
Objective 5
Flexible-Budget Variances
Total flexible-budget variance
= Total actual results
– Total flexible-budget planned results
Flexible-budget variances
Actual
results
Rs(11,570)
Flexible
budget
Rs(5,600)
Rs5,970 Unfavorable

14. Sales-Activity Variances
Total sales - activity variance
Actual sales unit – Master budgeted sales units =
Budgeted contribution margin per unit ×
Activity-level variances
Flexible budget
(7,000 – 9,000) × Rs9.20
Master budget =
Rs18,400 Unfavorable

15. Setting Standards A standard cost is a carefully
developed cost per unit
that should be attained.
An expected cost is the cost that
is most likely to be attained.
Perfection (ideal) standards are expressions of the most
efficient performance possible under the best conceivable
conditions, using existing specifications and equipment.
No provision is made for waste, spoilage,
machine breakdowns, and the like.

16. Currently Attainable Standards...
are levels of performance that
managers can achieve by
realistic levels of effort.
They make allowances for normal
defects, spoilage, waste,
and nonproductive time.

17. Trade-Offs Among Variances
Improvements in one area could lead to
improvements in others and vice versa.
Likewise, substandard performance
in one area may be balanced by
superior performance in others.

18. When to Investigate Variances
When should management
investigate a variance?
Many organizations have developed
such rules of thumb as “investigate
all variances exceeding Rs5,000 or 25%
of expected cost, whichever is lower.”

19. Comparison with Prior Periods
Some organizations compare the most
recent budget period’s actual results with
last year’s results for the same period.
These comparisons are not as useful as comparisons
of actual outcomes with planned results.

20. Flexible-Budget Variance in Detail
Standard per unit of output:
Std. inputs Flexible
expected Budget Amount
Direct Material 5 pounds Rs 2 /pound Rs10
Direct Labor ½ hour Rs16/hour Rs 8
Std. price
expected

21. Variances from Material and Labor Standards
Actual results for 7,000 units produced:
Direct material
Pounds purchased
and used: 36,800
Price/pound: Rs1.90
Total actual cost:
Rs69,920
Direct labor
Hours used: 3,750
Actual price (rate): Rs16.40
Total actual cost:
Rs61,500

22. Variances from Material and Labor Standards
Flexible Budget or Total Standard Cost Allowed =
Units of good output achieved ×
Input allowed per unit of output ×
Standard unit price of input

23. Variances from Material and Labor Standards
Standard Direct-Materials Cost Allowed:
7,000 units X 5 pounds X Rs2.00 per pound = Rs70,000*
Standard Direct-Labor Cost Allowed:
7,000 units X 1/2 hour X Rs16 per hour = Rs56,000**
(1) (2) (3)
Flexible
Actual Flexible Budget
Costs Budget Variance
Direct Materials Rs69, *Rs70,000 Rs F
Direct Labor , **Rs56, Rs5,500 U

24. Price and Quantity Variances
Learning
Objective 6
Price and Quantity Variances
Price variance:
(Applied to labor is called a rate variance)
(Actual price – Standard Price) × Actual quantity used
Quantity variance:
(Often called usage or efficiency variance)
(Actual quantity used – standard quantity allowed
for actual output) × Standard price

25. Price Variance Computations
Direct materials price variance:
(Rs1.90 – Rs2.00) per pound
× 36,800 pounds = Rs3,680 F
Direct labor price (rate) variance:
(Rs16.40 – Rs16.00) per hour
× 3,750 hours = Rs1,500 U

26. Quantity (Usage) Variance Computations
Direct-materials quantity variance:
[36,800 – (7,000 × 5)] pounds
× Rs2 per pound = Rs3,600 U
Direct-labor quantity variance:
[3,750 – (7,000 × ½)] hours
× Rs16 per hour = Rs4,000 U

27. Favorable or Unfavorable Variance?
To determine whether a variance is Favorable or
unfavorable, use logic rather than memorizing a formula.
A quantity variance is favorable if the actual quantity used is less than the standard quantity allowed.
A price variance is favorable is the actual price is less than the standard.

28. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
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CONTACT:
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29. Direct Materials Flexible Budget Variance
Rs3,680 favorable
+ Rs3,600 unfavorable
= Rs80 favorable
Direct-Labor Flexible-budget variance:
Rs1,500 unfavorable
+ Rs4,000 unfavorable
= Rs5,500 unfavorable

30. Interpretation of Price and Usage Variances
Price and usage variances are helpful
because they provide feedback to
those responsible for managing inputs.
Managers should not use these
variances alone for decision
making, control, or evaluation.

31. Variable-Overhead Spending and Efficiency Variances
Learning
Objective 7
Variable-Overhead Spending and Efficiency Variances
A variable-overhead efficiency variance occurs when
actual cost-driver activity differs from the standard
amount allowed for the actual output achieved.
A variable-overhead spending variance occurs when
the difference between the actual variable overhead
and the amount of variable overhead budgeted
for the actual level of cost-driver activity.

32. Variable-Overhead Variances
variable actual standard standard
overhead cost-driver cost-driver variable-overhead
efficiency activity activity rate per
variance allowed cost-driver unit - = X
variable actual standard actual overhead variable variable-overhead cost-driver
spending overhead rate per unit activity
variance of cost-driver used - = X

33. Fixed Overhead Spending Variance
Learning
Objective 8
Fixed Overhead Spending Variance
The difference between actual fixed
overhead and budgeted fixed overhead
Is the fixed overhead spending variance.

34. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
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CONTACT:
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.