Cost Accounting (14th Edition)

FLEXIBLE-BUDGET VARIANCES AND SALES-VOLUME VARIANCES 233
By removing this component from the static-budget variance, managers can compare
actual revenues earned and costs incurred for April 2011 against the flexible budget—the
revenues and costs Webb would have budgeted for the 10,000 jackets actually produced
and sold. These flexible-budget variances are a better measure of operating performance
than static-budget variances because they compare actual revenues to budgeted revenues
and actual costs to budgeted costs for the same 10,000 jackets of output.
Flexible-Budget Variances
The first three columns of Exhibit 7-2 compare actual results with flexible-budget amounts.
Flexible-budget variances are in column 2 for each line item in the income statement:
Flexible-budget
variance
= Actual
result
- Flexible-budget
amount
The operating income line in Exhibit 7-2 shows the flexible-budget variance is $29,100 U
($14,900 – $44,000). The $29,100 U arises because actual selling price, actual variable
cost per unit, and actual fixed costs differ from their budgeted amounts. The actual results
and budgeted amounts for the selling price and variable cost per unit are as follows:
Actual Result
Budgeted Amount
Selling price $125.00 ($1,250,000 ÷ 10,000 jackets) $120.00 ($1,200,000 ÷ 10,000 jackets)
Variable cost per jacket $ 95.01 ($ 950,100 ÷ 10,000 jackets) $ 88.00 ($ 880,000 ÷ 10,000 jackets)
The flexible-budget variance for revenues is called the selling-price variance because it arises
solely from the difference between the actual selling price and the budgeted selling price:
Selling-price
variance
Actual
= ¢
selling price -
Budgeted
selling price ≤ *
Actual
units sold
= ($125 per jacket - $120 per jacket) * 10,000 jackets
= $50,000 F
Webb has a favorable selling-price variance because the $125 actual selling price exceeds
the $120 budgeted amount, which increases operating income. Marketing managers are
generally in the best position to understand and explain the reason for this selling price
difference. For example, was the difference due to better quality? Or was it due to an
overall increase in market prices? Webb’s managers concluded it was due to a general
increase in prices.
The flexible-budget variance for total variable costs is unfavorable ($70,100 U) for the
actual output of 10,000 jackets. It’s unfavorable because of one or both of the following:
Webb used greater quantities of inputs (such as direct manufacturing labor-hours)
compared to the budgeted quantities of inputs.
Webb incurred higher prices per unit for the inputs (such as the wage rate per direct
manufacturing labor-hour) compared to the budgeted prices per unit of the inputs.
Higher input quantities and/or higher input prices relative to the budgeted amounts could
be the result of Webb deciding to produce a better product than what was planned or the
result of inefficiencies in Webb’s manufacturing and purchasing, or both. You should
always think of variance analysis as providing suggestions for further investigation rather
than as establishing conclusive evidence of good or bad performance.
The actual fixed costs of $285,000 are $9,000 more than the budgeted amount of
$276,000. This unfavorable flexible-budget variance reflects unexpected increases in the
cost of fixed indirect resources, such as factory rent or supervisory salaries.
In the rest of this chapter, we will focus on variable direct-cost input variances.
Chapter 8 emphasizes indirect (overhead) cost variances.
Decision
Point
How are flexiblebudget
and salesvolume
variances
calculated?