Capitulo 7

AC331 Chapter 7 Notes

1. Distinguish a static budget from a flexible budget

A static budget is the budget prepared by a business prior to the start of the budget period. A flexible budget is abudget prepared by a business after the budget period has ended, as part of the variance analysis process. A flexible budget uses the same underlying fixed cost and per-unit cost and revenueassumptions as the original static budget. The only difference between a static budget and a flexible budget is that the flexible budget uses actual output levels instead of budgeted output levels. Thedifference between the actual results and the original budget is called the static budget variance. The difference between the actual results and the flexible budget is called the flexible budgetvariance. A favorable variance is any difference that results in increased operating income compared to the budgeted amount; an unfavorable variance is any difference that results in less operating incomecompared to the budgeted amount.

2. Develop flexible budgets and compute flexible-budget variances and sales-volume variances

A flexible budget recalculates budgeted revenues and costs using theactual output during the budget period. The three-step process for developing the flexible budget is as follows:

1. Identify the actual output quantity.
2. Calculateflexible budget revenues (budgeted selling price x actual quantity).
3. Calculate flexible budget costs (budgeted per-unit cost x actual quantity plus fixed costs.)

The sales-volumevariance is strictly the difference resulting from actual output being different from the original static budget output. The flexible-budget variance is the difference between actual revenues or costsand the comparable flexible budget amounts.

3. Explain why standard costs are often used in variance analysis

Companies often set standards for use in preparation of budgets and subsequent...