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horngren16ech08im
Chapter8
FlexibleBudgetsandVarianceAnalysis
LEARNINGOBJECTIVES:
Whenyourstudentshavefinishedstudyingthischapter,theyshouldbeableto:
1.Identifyvariancesandlabelthemfavorableorunfavorable.
2.Distinguishbetweenflexiblebudgetsandstaticbudgets.
3.Useflexible-budgetformulastoconstructaflexiblebudget.
4.Computeandinterpretstatic-budgetvariances,flexible-budgetvariancesandsalesactivitybudgets.
5.Understandhowthesettingofstandardsaffectsthecomputationandinterpretationofvariances.
6.Computeandinterpretpriceandquantityvariancesformaterialsandlabor.
7.Computevariableoverheadspendingandefficiencyvariances.
8.Computethefixed-overheadspendingvariance.
CHAPTER8:
ASSIGNMENTS
CRITICALTHINKINGEXERCISES
19.InterpretationofFavorableandUnfavorableVariances
20.MarketingResponsibilityforSales-ActivityVariances
21.ProductionResponsibilityforFlexible-BudgetVariances
22.ResponsibilityofPurchasingManager
23.VariableOverheadEfficiencyVariance
EXERCISES
24.FlexibleBudget
25.BasicFlexibleBudget
26.FlexibleBudget
27.BasicFlexibleBudget
28.Activity-LevelVariances
29.Direct-MaterialVariances
30.LaborVariances
31.QuantityVariances
32.LaborandMaterialVariances
33.MaterialandLaborVariances
PROBLEMS
34.NationalParkService
35.FlexibleandStaticBudgets
36.SummaryExplanation
37.ExplanationofVarianceinIncome
38.ActivityandFlexible-BudgetVariancesatKFC
39.SummaryofAirlinePerformance
40.HospitalCostsandExplanationofVariances
41.FlexibleBudgeting
42.Activity-BasedFlexibleBudget
43.StraightforwardVarianceAnalysis
44.VarianceAnalysis
45.SimilarityofDirect-LaborandVariable-OverheadVariances
46.Material,Labor,andOverheadVariances
47.AutomationandDirectLaborasOverhead
48.StandardMaterialAllowances
49.RoleofDefectiveUnitsandNonproductiveTimeinSettingStandards
50.ReviewofMajorPointsinThisChapter
51.ReviewProblemonStandardsandFlexibleBudgets;AnswersAreProvided
CASES
52.ActivityandFlexible-BudgetVariances—Hospital
53.Activity-BasedCostingandFlexibleBudgeting
54.AnalyzingPerformance
55.CompleteVarianceAnalysism—GatesVideoGames
56.Nike10kProblem:
PerformanceStandards
EXCELAPPLICATIONEXERCISE57.Flexible-BudgetandSales-ActivityVariances
COLLABORATIVELEARNINGEXERCISE
58.SettingStandards
INTERNETEXERCISE
59.FlexibleBudgetsatHersheyFoodCorporation
()
CHAPTER8:
OUTLINE
I.UsingBudgetstoEvaluateActualResults{L.O.1}
A.FavorableandUnfavorableVariances
FavorableCostVariance—actualcostsarelessthanbudgetedcosts.
Favorable(F)versusUnfavorable(U)Variances
ProfitsRevenuesCosts
Actual>ExpectedFFU
Actual UnfavorableCostVariance—actualcostsexceedbudgetedcosts. StaticBudgetVariances(i.e.,variancesfrommasterbudgetamounts)maynotbeveryusefulinhelpingmanagementassesswhethercostsarebeingcontrolledadequatelywhentheactualactivityleveldiffersconsiderablyfromthestaticbudgetactivitylevel. B.StaticBudgetsVersusFlexibleBudgets{L.0.2} AllthemasterbudgetsdiscussedinChapter7arestaticorinflexible,becauseeventhoughtheymaybeeasilyrevised,theacceptedbudgetsassumefixedlevelsoffutureactivity.Astaticbudgetispreparedforonlyonelevelofactivity(forexample,volumeofsalesactivity).Differencesbetweenactualresultsandthestaticbudgetarestatic-budgetvariances. Actualresultscouldbecomparedwiththeoriginalplan,eventhoughadifferentactivitylevelwasreachedthanwasusedinconstructingthestaticbudget.SeeEXHIBIT8-1foranillustrationofthisintheperformancereport.Aperformancereportisagenerictermthatusuallymeansacomparisonofactualresultswithsomebudget.Variancesshownontheperformancereportdirectmanagement’sattentiontosignificantdeviationsfromexpectedresults,allowingmanagementbyexception. FlexibleBudget(orVariableBudget)—abudgetthatadjustsforchangesinsalesvolumeandothercost-driveractivities.Itisidenticaltothestaticbudgetinformat,butitcanbepreparedforanylevelsofactivity.Forperformanceevaluation,theflexiblebudgetwouldbepreparedfortheactuallevelsofactivityachieved.Differencesbetweenactualresultsandaflexiblebudgetareflexible-budgetvariances.Incontrast,thestaticbudgetiskeptfixedatonlytheoriginallyplannedlevelsofactivity. C.LimitationsofStatic-BudgetVariances D.Flexible-BudgetFormulas{L.O.3} ThecostfunctionsorformulasthatwerediscussedinChapters2and3areusedinconstructingflexiblebudgetswithintherelevantrangeofactivity.SeeEXHIBIT8-2foranillustrationoftheuseofabudgetformulafortheDominionCompanytocreatebudgetsfor7,000,8,000,and9,000unitsofsales.Thefixedcosts/expensesarethesame,intotal,ateachvolumelevel.Thevariablecosts/expensesincreasebythebudgetedamountforeachunitincreaseintheactivitylevel.Costdriversotherthanunitssoldorproducedmustbeconsideredincreatingflexiblebudgets.SeeEXHIBIT8-3foragraphofflexiblebudgetofcosts. E.Activity-BasedFlexibleBudgets Organizationsareincreasinglyadoptingactivity-basedcosting(ABC)systemsthathavemultiplecostdrivers.Activity-BasedFlexibleBudget—basedonbudgetedcostsforeachactivitycenterandrelatedcostdriver.ABCsystemsfocusonactivitiesastheprimarycostobjects.Costsofactivitycentersarethenassignedtofinalcostobjectssuchasproductsorcustomerclassesusingcostdrivers.CompaniesthatuseABCsystemsdevelopaflexiblebudgetforeachactivitycenter.SeeEXHIBIT8-4foranillustrationofDominionCompany’sactivity-basedflexiblebudget. F.Static-BudgetVarianceandFlexible-budgetVariances {L.O.4} Therearetwotypesofreasonswhyactualperformancemightnothaveconformedtothemasterbudget.First,salesandcost-driveractivitymaybedifferentthanthatforecasted(Activity-LevelVariances).Second,revenuesorvariablecostsperunitofactivityandfixedcostsperperiodmaynotbeasexpected(Flexible-BudgetVariances).SeeEXHIBIT8-6foranillustrationofthesetwotypesofvariances.Thesumoftheflexible-budgetvariancesandtheactivity-levelvariancesisthemasterbudgetvariance. II.RevenueandCostVariances{L.O.5} Managersusecomparisonsbetweenactualresults,masterbudgets,andflexiblebudgetstoevaluateorganizationalperformance.Inevaluatingperformance,itisusefultodistinguishEffectiveness(i.e.,thedegreetowhichagoal,objective,ortargetismet)andEfficiency(i.e.,thedegreetowhichinputsareusedinrelationtoagivenlevelofoutputs).Effectivenessmaybemeasuredbydeterminingwhetherthemasterbudgetgoalhasbeenmet.Efficiencycanbemeasuredbycomparingactualresultstotheflexiblebudget. A.Sales-ActivityVariances Thesevariancesmeasurehoweffectivemanagershavebeeninmeetingtheplannedlevelofsales.ThefinalthreecolumnsinEXHIBIT8-6forDominionCompanyshowthesales-activityvariances.Allunitpricesandvariablecostsareheldconstantinconstructingthemasterbudgetandtheflexiblebudget.Thedifferencesbetweentheamountsareduetothelevelofsalesactivity.Thesales-activityvarianceindicatestomanagerstheeffectofnotsellingthebudgetedsaleslevel.Marketingmanagersaretypicallyinthebestpositiontoexplainwhyactualsalesactivitiesdifferedfromplans. B.Flexible-BudgetVariances Flexible-budgetvariancesmeasuretheefficiencyofoperationsattheactuallevelofactivity.Thedifferencesbetweencolumns1and3inEXHIBIT8-6forDominionCompanyareflexible-budgetvariances.Thetotalflexible-budgetvarianceisthedifferencebetweentheactualincomeachievedandtheflexiblebudgetincomefortheachievedactivitylevel.Thetotalflexible-budgetvariancearisesfromsalespricesreceived,andthevariableandfixedcostsincurred.Flexible-budgetvariancesmayserveasthebasisforperiodicperformanceevaluation.Operationsmanagersareinthebestpositiontoexplainthesevariances.Thevariancesshouldnotbeusedtofixblame.Managersbeingevaluatedmayresorttocheatingtobeatthesystem. SeeEXHIBIT8-7foranexpanded,line-by-linecomputationofflexible-budgetvariancesforDominionCompany.Thevariancesshouldbeinterpretedassignalsthatactualoperationshavenotoccurredexactlyasanticipatedwhentheflexible-budgetformulaswereset,ratherthanasbeinggoodorbad.Anycostdifferingsignificantly(materially)fromtheflexiblebudgetmustbeexplained. C.SettingStandards ExpectedCost—thecostthatismostlikelytobeattained.StandardCost—acarefullydevelopedcostperunitthatshouldbeobtained.StandardCostSystems—valueproductsaccordingtoonlystandardcostsandareusedforinventoryvaluationpurposes.Forplanningandcontrolpurposes,expectedfuturecostsandexpectedfutureactivitylevelsareusedtosetbudgetsandprepareperformancereports.Thestandardcostsfromthestandardcostsystemarenotnecessarilyusedbecausetheymaydifferfromtheexpectedfuturecosts.Companiesusedifferentcostsystemsforinventoryvaluation,productcostingfordecision-making,andforperformanceevaluation. Whatstandardofexpectedperformanceshouldbeused? PerfectionStandards(orIdealStandards)—expressionsofthemostefficientperformancepossibleunderthebestconceivableconditions,usingexistingspecificationsandequipment.Noprovisionismadeforspoilage,waste,machinebreakdowns,andsoon.Thesest
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