Flexible Budgets & Direct-Cost Variances in Management Control
Chapter 12: Flexible Budgets, Direct-Cost Variances, and Management Control
12-4 What is the key difference between a static budget and a flexible budget?
The key difference is the output level used to set the budget. A static budget is based on the level of output planned at the start of the budget period. A flexible budget is developed using budgeted revenues or cost amounts based on the actual output level in the budget period. The actual level of output is not known until the end of the budget period.
12-5 Why might managers find a flexible-budget analysis more informative than a static-budget analysis?
A flexible-budget analysis enables a manager to distinguish how much of the difference between an actual result and a budgeted amount is due to:
- The difference between actual and budgeted output levels, and
- The difference between actual and budgeted selling prices, variable costs, and fixed costs.
12-10 Describe three reasons for an unfavorable direct labour efficiency variance.
Some possible reasons for an unfavorable direct manufacturing labor efficiency variance are:
- The hiring and use of underskilled workers
- Inefficient scheduling of work so that the workforce was not optimally occupied
- Poor maintenance of machines resulting in a high proportion of non-value-added labor
- Unrealistic time standards
Each of these factors would result in actual direct manufacturing labor-hours being higher than indicated by the standard work rate.
12-21 Flexible Budget
Variance Analysis for Brabham Ltd for August
| Actual Results (1) | Flexible-Budget Variances (2) = (1) – (3) | Flexible Budget (3) | Sales-Volume Variances (4) = (3) – (5) | Static Budget (5) | |
|---|---|---|---|---|---|
| Units (tires) sold | 3,800g | 0 | 3,800 | 200 U | 4,000g |
| Revenues | $501,600a | $ 30,400 U | $532,000b | $28,000 U | $560,000c |
| Variable costs | 351,500d | 28,500 U | 323,000e | 17,000 F | 340,000f |
| Contribution margin | 150,100 | 58,900 U | 209,000 | 11,000 U | 220,000 |
| Fixed costs | 100,000g | 24,000 F | 124,000g | 0 | 124,000g |
| Operating profit | $ 50,100 | $34,900 U | $ 85,000 | $ 11,000 U | $ 96,000 |
Note: U = Unfavorable, F = Favorable