Question

In chapter 7 we learn about flexible budgets, direct-cost variances and management control. How is the flexible budget in this chapter different from the master budget in chapter 6? How is the flexible budget variance different from the sales volume variance and define each? (2 sentence maximum). How is the price variance different from the efficiency variance? (1 sentence maximum.)

Answer 1

Master budgets , starting with the sales budget are drawn up for a partiular level of operations/ sales . Various relevent budgets such as production/purcgase budget, labor cost budget , various expense budget & cash budget follow . Thus is called a static budget.

When the capacity level/sales level change , the same budget is re-stated flexibly,ie, proportionately , with respect to all items of expenses & revenues other than sales .This is called a flexible budget.

A flexible budget variance , shows the variances in all expenses & other revenues due to a change in sales level, ie. Highlights the variance between the budgeted & actual expenses & revenues , when actual capacity levels differ from that budgeted.

Flexible budget is re-stating the static budget ,according to the capacity utilistaion/sales level achieved.

So, flexible budget variance arises when the actuals vary from this flexible budget, re-stated as above.

Whereas,

Sales Volume Variance measures the monetary quantum of change in profit In case of full/absorption costing) or contribution (in case of marginal costing), resulting because of the difference between actual and budgeted sales quantity (volume) .

Price Variance measures the (total) variance in the total cost or sales revenue , due to variance-between the standard and the actual-- in per unit cost/price

Efficiency Variance measures the (total) variance in the total cost or sales revenue , due to variance-between the standard and the actual-- usage per unit bought /sold.