Financial & Management Decisions (FMD) year 2 quarter 2 Avans
Financial and Management Accounting II Chapter 7, 11, 5, 6
notes lectures finance first year quarter 1 and 2
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International Business & Management
Finance
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Finance summary year 2 Q2
Chapter 8 flexible budgets and variance analysis
1. identify variances and label them as favorable or unfavorable
We label profit, revenue, and cost variances as favorable or unfavorable depending on the
direction of the effect on profitability.
- Favorable profit variances arise when actual profits exceed budgeted profits.
- Unfavorable profit variances arise when actual profits fall below budgeted profits.
Because increases in revenues increase profits, revenue variances work in exactly the same
way: When actual revenues exceed budgeted revenues we have favorable revenue
variances, and actual revenues below budgeted revenues result in unfavorable revenue
variances.
However, cost variances work in the opposite way because increases in costs decrease
profitability: When actual costs exceed budgeted costs we have unfavorable cost variances,
and actual costs less than budgeted costs result in favorable cost variances. The following
chart summarizes these relationships using the abbreviations that we will use for favorable
(F) and unfavorable (U) variances.
2. Distinguish between flexible budgets and static budgets.
A budget prepared for only one expected level of activity is a static budget. revenues, costs,
and profits expected
A budget that adjusts to different levels of activity is a flexible budget (sometimes called a
variable budget). revenues, costs, and profits expected at different volumes.
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.
3. Use flexible-budget formulas to construct a flexible budget based on the volume of
sales.
To develop a flexible budget, managers use flexible-budget formulas that describe revenue
and cost behavior with respect to appropriate cost drivers. The cost functions are examples
of flexible-budget formulas. The flexible budget incorporates effects of changes in activity on
each revenue and cost. Note that the static budget is just the flexible budget for a single
assumed level of activity.
3. Prepare an activity-based flexible budget. miss niet
- approach when units of output is a plausible and reliable cost driver for all
, of a company’s cost. → flexible budget
- activity-based flexible budget; a budget based on budgeted costs for each activity
using the related cost driver
- four activities; processing, setup, marketing, administration
4. Explain the performance evaluation relationship between static budgets, flexible
budgets, and actual results.
Actual results may differ from the master budget because sales and other cost-driver
activities were not the same as originally forecasted or revenue or variable costs per unit of
activity and fixed costs per period were not as expected
Actual results might differ from the static budget because (1) actual output levels were not
the same as in the static budget, or (2) actual revenues and costs differed from those in the
flexible budget for the actual level of output achieved.
Isolating the Causes of Variances
Managers use comparisons among actual results, master budgets, and flexible budgets to
evaluate organizational performance.
5. Compute activity-level variances and flexible-budget variances.
static budget variance; the difference between actual results and the static budget for the
original planned level of output.
- the difference between actual results and the flexible budget
- the difference between the flexible budget and the static budget → the
activity level variance
flexible budget variance; the difference between actual results and the flexible budget for the
actual level of output achieved.
Just as we can divide income into its component revenues minus costs, we can divide the
flexible-budget income variance into revenue and cost variances.
Total flexible-budget variance = Total actual results – Total flexible-budget planned results
(at sales level)
de kosten van de sales die echt hebben plaatsgevonden - real amount of pounds sold x
expected cost
activity level variances; the differences between the static budget amounts and the amounts
in the flexible budget.
sales activity variances; the activity-level variances when sales is used as the cost driver.
sales activity income variance = ( actual unit - static budget units) x contribution margin per
unit
there can never be a sales activity variance for fixed costs, as long as the budgeted activity
levels remain within the relevant range. because for fixed costs,the total budgeted amounts
are the same in the flexible budget and the static budget.
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