Cost Accounting

LECTURE (3) 29 FEB 2020

 Flexible-Budget
Variances and Sales-
Volume Variances
29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 3
“Level” of Variance analysis denotes the amount of detail shown by a
variance analysis.
Level (1): reports the least detail (Static-budget variance (least
details )

Level (2): offers more information; flexible-budget variances

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 4

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 5
Managers want to: know
o How much of the static-budget variance is due to Webb inaccurately
forecasting what it expected to produce and sell and

o How much of the static-budget variance is due to how it actually

performed manufacturing and selling 10,000 jackets.

Managers, therefore, create a flexible budget, which enables a more in-

depth understanding of deviations from the static budget.

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 6

 Flexible Budgets
What is Flexible Budget?
A flexible budget calculates budgeted revenues and budgeted costs based on
the actual output at the end of the budget period
How to prepare flexible Budget?
It prepared by replacing the budgeted output (12000 jackets) in the static-
budget with the actual output (10,000 jackets)

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 7

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 8
 Calculate
Objective (3) Flexible-budget
The flexible budget allows variances and
for a more detailed analysis
of the $93, 100 unfavorable
static-budget variance for
operating income
Sales-volume
variances

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 9

Flexible-budget variance analysis subdivides the $93,100 unfavorable
static-budget variance for operating income into two parts:

Sales-volume variance of Flexible budget variance

$64,000 U. $29,100 U
The sales-volume variance is the
difference between: The flexible-budget variance is
the difference between:
1. flexible-budget amount 1. actual result
2. static-budget amount. 2. flexible-budget amount.

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 10

 Flexible –budget variance Sales volume variance
$29,100 U $64,000 U

Static- budget
Actual results Flexible budget
Budgeted revenues
Actual revenues Budgeted revenues budgeted costs
Actual costs budgeted costs
Budgeted outputs
Actual outputs Actual outputs (12,000)
(10,000 ) jackets (10,000) jackets

29/2/2020
Static- budget variance
PROF NARGIS MAKHAIEL
$93,100 U
COST ACCOUNTING FOURTH GRADE 11
29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 12
 Sales-volume Variances

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 13

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 14
29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 15
The sales-volume variance in operating income for Webb measures the
change in the budgeted contribution margin because Webb sold only
10,000 jackets rather than the budgeted 12,000.

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 16

 Why this variance called Sales-Volume Variances
o Flexible-budget amounts and
o Static budget amounts
are both computed using budgeted selling prices, budgeted variable cost per jacket, and
budgeted fixed costs.
The difference between the static-budget and the flexible-budget amounts arises solely from

the difference between the 10,000 actual volume of output (jackets) sold in flexible budget
and the 12,000 volume of budgeted outputs (jackets) that were expected to be sold in the static
budget.
Therefore the difference between flexible budget and static budget is called the

sales-volume variance
29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 17
the sales volume variance, reflects the effects of selling fewer
units or inaccurate forecasting of sales.
meaning it reflects:
Either
selling actual units (10,000) lower than expected units of sales
(12,000)
or
overestimating the budgeted sales 12,000 (inaccurate
forecasting) more than the actual sales (10,000)

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 18

The unfavorable sales-volume variance in operating income
($64,000) arises because of one or more of the following reasons:
Market-related reasons
1. Failure of Webb’s managers to execute the sales plans
2. Weaker than anticipated overall demand for jackets
3. Competitors taking away market share from Webb
4. Unexpected changes in customer tastes and preferences away from
Webb’s designs
Quality –related reasons
5. Quality problems leading to customer dissatisfaction with Webb’s jackets

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 19

How Webb responds to the unfavorable sales-volume variance will depend on
what its managers believe caused the variance.

For example, if Webb’s managers believe the unfavorable sales-volume variance

was caused by market-related reasons (reasons 1, 2, 3, or 4),
the sales manager would be in the best position to explain what happened and
suggest corrective actions that may be needed, such as :
o Sales promotions,
o Market studies, or
o Changes to advertising plans.

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 20

If, however, managers believe the unfavorable sales-volume variance was caused
by unanticipated quality problems (reason 5),

the production manager would be in the best position to analyze the causes and
suggest strategies for improvement, such as:
o Changes in the manufacturing process or
o Investments in new machines.

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 21

 Flexible-budget variances

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29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 23
From where Flexible-budget variance $29,100 U comes?

(actual results – flexible budget)

Note that the volume of production and sales are the same in actual results
and flexible budget (10, 000 jackets).

Flexible-budget variance $29,100 U arises:

 Actual selling price, differ from budgeted selling price
 Actual variable cost per unit, differ from budgeted variable costs
 Actual fixed costs differ from budgeted fixed costs

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 24

 flexible-budget variance for
revenues
(F)

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 25

The flexible-budget variance for revenues is called the selling-price
variance because

this variance arises solely from the difference between the actual
selling price and the budgeted selling price:

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 26

Webb has a favorable selling-price variance because:
$125 actual selling price exceeds the $120 budgeted selling price, which
increases operating income.
Marketing managers are generally in the best position to understand and explain
the reason for a selling price difference.
For example, the difference might due to:
 better quality? Or
 overall increase in market prices?

Webb’s managers concluded it was due to a general increase in prices.

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 27

 flexible-budget variance for
total variable costs

U
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The flexible-budget variance for total variable costs is unfavorable ($70,100
U) for the actual output of 10,000 jackets.

It’s unfavorable because of one or both of the following:

■ Webb used greater quantities of inputs compared to the
budgeted quantities of inputs.
(such as direct manufacturing labor-hours)
■ Webb incurred higher prices per unit for the inputs compared
to the budgeted prices per unit of the inputs.
(such as the wage rate per direct manufacturing labor-hour)

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 29

Higher input quantities and/or higher input prices relative to the
budgeted amounts could be the result from:
• Webb deciding to produce a better product than what was
planned or
• the result of inefficiencies related to Webb’s manufacturing and
purchasing operations or
• both.

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 30

 flexible-budget variance for
total fixed costs

U
29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 31
The actual fixed costs of $285,000 are more than the budgeted amount
of $276,000 with $9,000 U

This unfavorable flexible-budget variance reflects unexpected

increases in the cost of fixed indirect resources, such as the factory’s
rent or supervisors’ salaries.

29/2/2020 PROF NARGIS MAKHAIEL COST ACCOUNTING FOURTH GRADE 32

 Flexible –budget variance Sales volume variance
$29,100 U $64,000 U

Static- budget
Actual results Flexible budget
Budgeted revenues
Actual revenues Budgeted revenues budgeted costs
Actual costs budgeted costs
Budgeted outputs
Actual outputs Actual outputs (12,000)
(10,000 ) jackets (10,000) jackets

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Static- budget variance
PROF NARGIS MAKHAIEL
$93,100 U
COST ACCOUNTING FOURTH GRADE 33
Flexible-budget variances are a better measure of sales price and cost performance than static
budget variances because
they compare actual revenues to budgeted revenues and actual costs to budgeted costs for the
same 10,000 jackets of output.

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