Question

What are the relations among standard costs, flexible budgets, variance analysis, and management by exception?

Please elaborate thank you

Answer 1

Standard costs, variance analysis, flexible budgets and management by exception are all tools of budgetary control and analysis.

Standard costs are the cost which management fix with the help of department heads at a certain level of output and these costs are then compared against actual costs to compute variances.

The variance analysis is done for all the departments or individual units in organization to check wether the operations are conducted as expected.

The departments who have a little variance are not reported to management, the items which are of material importance and have greater variances are reported to the management this is termed as management by exception.

Flexible budgets are an important tool of budgetary analysis as it depicts costs both fixed and variable at different level of activities so as to decide which would be the optimum activity where the cost benefit analysis is done to show maximum profits.