St Mary University

Department of Accounting and Finance

Cost and Management Accounting II

Assignment Questions on Master Budget, Flexible Budgets and Variance Analysis

1. Distinguish between favorable and unfavorable variances.

Favorable variances are those deviations that have a positive impact on the company's
performance or profitability. For revenue, when the actual result is more than the budgeted
amount the deviation is favorable variance. For expenses, when the actual results is less than the
budgeted one, the deviation is favorable variance.

On the other hand, unfavorable variances are those deviations that have had a negative impact on
the company's performance or profitability. They indicate that actual results are short of
budgeted results. For revenue, when the actual results are less than the budgeted one, the
deviation is called unfavorable variance. For expense, when the actual results are greater than the
budgeted one the deviation is unfavorable variance.

2. "We want flexible budgets because costs are difficult to predict. We need the flexibility to
change budgeted costs as input prices change." Does flexible budget serve this purpose? Explain.

Yes, flexible budgets serve this purpose of changing the budgeted costs as input prices change.
Flexible budgets allow for changes to be made in the budgeted costs based on the actual level of
activity (e.g. changes in production or sales volume) and the actual cost of inputs. This ensures
that the budget remains realistic and relevant, which helps in better planning and decision-
making. For example, if the input prices increase , a flexible budget can be adjusted to account
for the increase in costs and maintain profitability.

3. Explain the role of understanding cost behavior and cost-driver activities for flexible
budgeting.

Understanding cost behavior and cost-driver activities is essential for flexible budgeting because
it enables companies to adjust their budgets to changes in activity levels and make better
decisions. Cost behavior refers to the way in which costs change in response to changes in
business activity, such as sales volume or production levels. Cost-driver activities are the
activities that cause costs to change in response to changes in business activity.

By understanding cost behavior and cost-driver activities, companies can create flexible budgets
that can be adjusted based on changes in business activity. For example, if sales volume
increases, a company can use its knowledge of cost-driver activities to project how its costs will
change and adjust its budget accordingly. This allows the company to plan for and manage its
cash flow more effectively
4. Differentiate between a master budget variance and a flexible budget variance.
A master budget variance is the difference between the actual revenue or expenses and the
budgeted revenue or expenses on the static budget. It measures the overall performance of the
organization based on the original budget. It focuses on the variance between actual results and
budgeted results.

On the other hand, a flexible budget variance is the difference between the actual revenue or
expenses and the budgeted revenue or on flexible budget. It measures the performance of the
organization based on its actual level of productivity.

5. "Managers should be rewarded for favorable variances and punished for unfavorable
variances." Do you agree? Explain.

- The idea of rewarding and punishing managers based on variances can create a fear, unfairness,
and bias. Managers may feel demotivated and discouraged to take risks.
- Variances are not always in the control of the managers. Sometimes, external factors such as
market conditions, competition, or natural disasters can affect the results. It is not be fair to
accuse managers for things beyond their control.

In conclusion, managers should be evaluated based on various factors such as their leadership,
communication, teamwork, creativity, and problem-solving skills.

6. "A good control system places the blame for every unfavorable variance on someone in the
organization. Without affixing blame, no one will take responsibility for cost control." Do you
agree? Explain.

While taking responsibility is a critical part of cost control, the statement ignores the possibility
that sometimes circumstances beyond an individual's control may cause unfavorable variances.
Moreover, the blaming one to another may create a blame culture within an organization and
discourage innovation and risk-taking.

Instead, a better control system may focus on identifying the main cause of unfavorable
variances and taking corrective measures to address the issue rather than solely assigning
responsibility.

In conclusion, while taking responsibility is essential for cost control, it is equally vital to avoid
creating a culture of blame. An effective cost control system should strive to identify and address
the root cause of issues while promoting transparency and open communication.

7. Differentiate between perfection standards and currently attainable standards.

Perfection standards refer to an ideal level of performance or that may be difficult or impossible
to achieve in reality. These standards usually represent the best possible outcome that can be
imagined and are often based on theoretical or hypothetical scenarios. They are usually set by the
organization or individual themselves with the aim of achieving excellence.
Currently attainable standards, on the other hand, refer to the level of performance that can be
achieved given the available resources, skills, and knowledge. These standards represent a more
practical and achievable level of performance that is based on the current state of technology,
resources, and other constraints. They are usually set by the organization.

The main difference between perfection standards and currently attainable standards is that
perfection standards are often theoretical and unattainable, while currently attainable standards
are more practical and achievable. Perfection standards may be used as a model for
improvement, but it is important to recognize that they may not always be achievable. Currently
attainable standards, on the other hand, are more realistic and represent the minimum level of
quality that is expected.

8. "Price variances should be computed even if prices are regarded as being outside of company
control." Do you agree? Explain.

Yes, price variances should be computed even if prices are regarded as being outside of company
control. Because price variances are an essential part of standard costing and can provide
valuable insights into cost management and profitability.

Price variances occur when the actual cost of a product or service differs from the standard cost
that was budgeted. While some factors affecting prices may be beyond the company's control,
such as changes in market demand, currency fluctuations, and inflation, it is still important to
track and analyze these variances.

By doing so, managers can identify the root cause of the variance and take corrective actions to
balance the impact of price changes on the company's financial performance. For instance, if the
price of a raw material used in production increases, the company can search alternative
suppliers..

9. What are some common causes of usage variances?

1. Multiple sources of data with differing levels of quality or accuracy

2. Errors or inconsistency in data collection or reporting methods
3. Changes in demographics or customer behavior
4. Insufficient training or knowledge among users
5. Technological limitations or discrepancies in software or data systems

10. "Failure to meet price standards is the responsibility of the purchasing officer." Do you
agree? Explain

YES, it is their responsibility to negotiate and ensure that the prices of goods or services are
within the set standards or budget. If the purchasing officer fails to meet the expected price
standards, they can be held accountable for not performing their responsibilities efficiently.
However, it is also important to note that other factors such as market conditions, availability of
cheaper alternatives and inflation can affect the prices of goods, and these factors are beyond the
control of the purchasing officer.
11. Are direct material price variances generally recognized when the materials are purchased or
when they are used? Why?

Direct material price variances are generally recognized when the materials are purchased
because it allows for timely identification and correction of any price change. Waiting until the
materials are used may result in delays in identifying variances and correcting them, which could
negatively impact the profitability of the production process. Additionally, recognizing variances
at the time of purchase allows managers to adjust their purchasing strategy and negotiate better
prices with suppliers in the future.

12. Why do the techniques for controlling overhead differ from those controlling direct
materials?

The techniques for controlling overhead differ from those controlling direct materials because
overhead costs are indirect costs that cannot be easily traced to a specific product or service,
while direct materials are direct costs that can be easily traced to a specific product or service.

13. How does the variable overhead spending variance differ from the direct labor rate variance?

The variable overhead spending variance and the direct labor rate variance are two different
types of variances, and they differ in their calculations and meanings. The differences between
them are:

The variable overhead spending variance is calculated as the difference between the actual
variable overhead costs and the budgeted variable overhead costs, multiplied by the actual
activity level. On the other hand, the direct labor rate variance is calculated as the difference
between the actual hourly labor rate and the standard hourly labor rate, multiplied by the actual
hours worked.

The variable overhead spending variance is affected by factors such as changes in prices, usage
of supplies and materials, and efficiency of operations. The direct labor rate variance is affected
by factors such as wage rates, employee retention, and level of experience.

The variable overhead spending variance is controlled by management through the purchasing
and supply chain functions, as well as operational efficiency. The direct labor rate variance is
controlled by the human resources function through wage rate negotiations, training and
development programs, and employee motivation and retention programs.