Question

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Flexible Budget and Standard Costs: DQ 21-13

The relations among management by exception, variance analysis, flexible budgets, and standard cost are that they all focus on the effectiveness and efficiency or a company. Management by exception is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected. The larger the variance, the more likely the area is not operating as expected. Variances assist managers in their planning and control decisions. Variance analysis helps managers identify areas not operating as expected. The flexible budget, also known as the variable budget, is based on several different amounts of sales or other activity measures. It recognizes that there can be fluctuations in output and hence expenses also vary in a month or a year. Unlike a static budget, a flexible budget can recognized that, if output goes down, the manager of a department has to decrease variable expenses and similarly to if output goes up, then an increase to spending. This helps identify the output per area so managers know which areas are not operating as expected. In a variance analysis, a standard cost performance sheet is prepared followed by computing and analyzing variances. This helps highlight operations not proceeding to plan. We then form a corrective and strategic action to solve the problem under management by exception. When combining all of these into a system, we control price decisions, cost management, and budgetary planning and control.

Answer 1

1. Management by exception is a practice to identify the financial and operational indifferences of a business that happens ahead of expected or budgeted reports. This indifferences are called as Variances.

2. Management by exception is an action of concentrating on the areas not operating efficiently leaving behind the areas operating efficiently.

3. Standard costs and Actual costs forms part of Variance analysis where the Variance forms the difference between the standard costs and the actual costs determined so that that managers can concentrate on the areas with more or large variances.

4. Managers use these variance reports for picking up the areas not performing properly and concentrate on them by making them more effective. Variances include material, labor, overhead etc,.

5. Flexible budget is a budget that changes with the volume of activities rather being standardized as that of a static budget.

6. Managers mostly prefer flexible budget because they can elaborately identify the loop holes of a business or area of activity and concentrate in that particular for effective control over the business.

7. Combining these variance and budgets, the similar output is to control price decisions, cost management and budgetary planning and control.

8. So finally, standard cost should not be mentioned separately as it forms part of variance analysis and the main part of discussion here is the thing called Management by exception where flexible budget, variance analysis forms part.