Cost Accounting (14th Edition)

232 CHAPTER 7 FLEXIBLE BUDGETS, DIRECT-COST VARIANCES, AND MANAGEMENT CONTROL
Learning
Objective 3
Calculate flexiblebudget
variances
. . . each flexiblebudget
variance is the
difference between an
actual result and a
flexible-budget amount
and sales-volume
variances
. . . each sales-volume
variance is the difference
between a flexiblebudget
amount and a
static-budget amount
Sales-Volume Variances
Keep in mind that the flexible-budget amounts in column 3 of Exhibit 7-2 and the
static-budget amounts in column 5 are both computed using budgeted selling prices,
budgeted variable cost per jacket, and budgeted fixed costs. The difference between
the static-budget and the flexible-budget amounts is called the sales-volume variance
because it arises solely from the difference between the 10,000 actual quantity (or volume)
of jackets sold and the 12,000 quantity of jackets expected to be sold in the
static budget.
Sales-volume
variance for = Flexible-budget - Static-budget
amount amount
operating income
= $44,000 - $108,000
= $64,000 U
The sales-volume variance in operating income for Webb measures the change in budgeted
contribution margin because Webb sold only 10,000 jackets rather than the budgeted
12,000.
Sales-volume
variance for = a
operating income
Budgeted contribution Actual units
b * a
margin per unit
sold
Budgeted selling
= a -
price
= ($120 per jacket - $88 per jacket) * (10,000 jackets - 12,000 jackets)
= $32 per jacket * (-2,000 jackets)
= $64,000 U
- Static-budget
units sold
b
Budgeted variable Actual units
b * a
cost per unit
sold
- Static-budget
units sold
b
Exhibit 7-2, column 4, shows the components of this overall variance by identifying the
sales-volume variance for each of the line items in the income statement. Webb’s managers
determine that the unfavorable sales-volume variance in operating income could be
because of one or more of the following reasons:
1. The overall demand for jackets is not growing at the rate that was anticipated.
2. Competitors are taking away market share from Webb.
3. Webb did not adapt quickly to changes in customer preferences and tastes.
4. Budgeted sales targets were set without careful analysis of market conditions.
5. Quality problems developed that led to customer dissatisfaction with Webb’s jackets.
How Webb responds to the unfavorable sales-volume variance will be influenced by
what management believes to be the cause of the variance. For example, if Webb’s managers
believe the unfavorable sales-volume variance was caused by market-related reasons
(reasons 1, 2, 3, or 4), the sales manager would be in the best position to explain
what happened and to suggest corrective actions that may be needed, such as sales promotions
or market studies. If, however, managers believe the unfavorable sales-volume
variance was caused by quality problems (reason 5), the production manager would be
in the best position to analyze the causes and to suggest strategies for improvement, such
as changes in the manufacturing process or investments in new machines. The appendix
shows how to further analyze the sales volume variance to identify the reasons behind
the unfavorable outcome.
The static-budget variances compared actual revenues and costs for 10,000 jackets
against budgeted revenues and costs for 12,000 jackets. A portion of this difference, the
sales-volume variance, reflects the effects of inaccurate forecasting of output units sold.