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5.Understandhowthesettingofstandardsaffectsthecomputationandinterpretationofvariances.

6.Computeandinterpretpriceandquantityvariancesformaterialsandlabor.

7.Computevariableoverheadspendingandefficiencyvariances.

8.Computethefixed-overheadspendingvariance.

CHAPTER8:

ASSIGNMENTS

CRITICALTHINKINGEXERCISES

19.InterpretationofFavorableandUnfavorableVariances

20.MarketingResponsibilityforSales-ActivityVariances

21.ProductionResponsibilityforFlexible-BudgetVariances

22.ResponsibilityofPurchasingManager

23.VariableOverheadEfficiencyVariance

EXERCISES

24.FlexibleBudget

25.BasicFlexibleBudget

26.FlexibleBudget

27.BasicFlexibleBudget

28.Activity-LevelVariances

29.Direct-MaterialVariances

30.LaborVariances

31.QuantityVariances

32.LaborandMaterialVariances

33.MaterialandLaborVariances

PROBLEMS

34.NationalParkService

35.FlexibleandStaticBudgets

36.SummaryExplanation

37.ExplanationofVarianceinIncome

38.ActivityandFlexible-BudgetVariancesatKFC

39.SummaryofAirlinePerformance

40.HospitalCostsandExplanationofVariances

41.FlexibleBudgeting

42.Activity-BasedFlexibleBudget

43.StraightforwardVarianceAnalysis

44.VarianceAnalysis

45.SimilarityofDirect-LaborandVariable-OverheadVariances

46.Material,Labor,andOverheadVariances

47.AutomationandDirectLaborasOverhead

48.StandardMaterialAllowances

49.RoleofDefectiveUnitsandNonproductiveTimeinSettingStandards

50.ReviewofMajorPointsinThisChapter

51.ReviewProblemonStandardsandFlexibleBudgets;

AnswersAreProvided

CASES

52.ActivityandFlexible-BudgetVariances—Hospital

53.Activity-BasedCostingandFlexibleBudgeting

54.AnalyzingPerformance

55.CompleteVarianceAnalysism—GatesVideoGames

56.Nike10kProblem:

PerformanceStandards

EXCELAPPLICATIONEXERCISE57.Flexible-BudgetandSales-ActivityVariances

COLLABORATIVELEARNINGEXERCISE

58.SettingStandards

INTERNETEXERCISE

59.FlexibleBudgetsatHersheyFoodCorporation

（）

OUTLINE

I.UsingBudgetstoEvaluateActualResults{L.O.1}

A.FavorableandUnfavorableVariances

FavorableCostVariance—actualcostsarelessthanbudgetedcosts.

Favorable（F）versusUnfavorable（U）Variances

ProfitsRevenuesCosts

Actual>

ExpectedFFU

Actual<

ExpectedUUF

UnfavorableCostVariance—actualcostsexceedbudgetedcosts.

StaticBudgetVariances（i.e.,variancesfrommasterbudgetamounts）maynotbeveryusefulinhelpingmanagementassesswhethercostsarebeingcontrolledadequatelywhentheactualactivityleveldiffersconsiderablyfromthestaticbudgetactivitylevel.

B.StaticBudgetsVersusFlexibleBudgets{L.0.2}

AllthemasterbudgetsdiscussedinChapter7arestaticorinflexible,becauseeventhoughtheymaybeeasilyrevised,theacceptedbudgetsassumefixedlevelsoffutureactivity.Astaticbudgetispreparedforonlyonelevelofactivity（forexample,volumeofsalesactivity）.Differencesbetweenactualresultsandthestaticbudgetarestatic-budgetvariances.

Actualresultscouldbecomparedwiththeoriginalplan,eventhoughadifferentactivitylevelwasreachedthanwasusedinconstructingthestaticbudget.SeeEXHIBIT8-1foranillustrationofthisintheperformancereport.Aperformancereportisagenerictermthatusuallymeansacomparisonofactualresultswithsomebudget.Variancesshownontheperformancereportdirectmanagement’sattentiontosignificantdeviationsfromexpectedresults,allowingmanagementbyexception.

FlexibleBudget（orVariableBudget）—abudgetthatadjustsforchangesinsalesvolumeandothercost-driveractivities.Itisidenticaltothestaticbudgetinformat,butitcanbepreparedforanylevelsofactivity.Forperformanceevaluation,theflexiblebudgetwouldbepreparedfortheactuallevelsofactivityachieved.Differencesbetweenactualresultsandaflexiblebudgetareflexible-budgetvariances.Incontrast,thestaticbudgetiskeptfixedatonlytheoriginallyplannedlevelsofactivity.

C.LimitationsofStatic-BudgetVariances

D.Flexible-BudgetFormulas{L.O.3}

ThecostfunctionsorformulasthatwerediscussedinChapters2and3areusedinconstructingflexiblebudgetswithintherelevantrangeofactivity.SeeEXHIBIT8-2foranillustrationoftheuseofabudgetformulafortheDominionCompanytocreatebudgetsfor7,000,8,000,and9,000unitsofsales.Thefixedcosts/expensesarethesame,intotal,ateachvolumelevel.Thevariablecosts/expensesincreasebythebudgetedamountforeachunitincreaseintheactivitylevel.Costdriversotherthanunitssoldorproducedmustbeconsideredincreatingflexiblebudgets.SeeEXHIBIT8-3foragraphofflexiblebudgetofcosts.

E.Activity-BasedFlexibleBudgets

Organizationsareincreasinglyadoptingactivity-basedcosting（ABC）systemsthathavemultiplecostdrivers.Activity-BasedFlexibleBudget—basedonbudgetedcostsforeachactivitycenterandrelatedcostdriver.ABCsystemsfocusonactivitiesastheprimarycostobjects.Costsofactivitycentersarethenassignedtofinalcostobjectssuchasproductsorcustomerclassesusingcostdrivers.CompaniesthatuseABCsystemsdevelopaflexiblebudgetforeachactivitycenter.SeeEXHIBIT8-4foranillustrationofDominionCompany’sactivity-basedflexiblebudget.

F.Static-BudgetVarianceandFlexible-budgetVariances

{L.O.4}

Therearetwotypesofreasonswhyactualperformancemightnothaveconformedtothemasterbudget.First,salesandcost-driveractivitymaybedifferentthanthatforecasted（Activity-LevelVariances）.Second,revenuesorvariablecostsperunitofactivityandfixedcostsperperiodmaynotbeasexpected（Flexible-BudgetVariances）.SeeEXHIBIT8-6foranillustrationofthesetwotypesofvariances.Thesumoftheflexible-budgetvariancesandtheactivity-levelvariancesisthemasterbudgetvariance.

II.RevenueandCostVariances{L.O.5}

Managersusecomparisonsbetweenactualresults,masterbudgets,andflexiblebudgetstoevaluateorganizationalperformance.Inevaluatingperformance,itisusefultodistinguishEffectiveness（i.e.,thedegreetowhichagoal,objective,ortargetismet）andEfficiency（i.e.,thedegreetowhichinputsareusedinrelationtoagivenlevelofoutputs）.Effectivenessmaybemeasuredbydeterminingwhetherthemasterbudgetgoalhasbeenmet.Efficiencycanbemeasuredbycomparingactualresultstotheflexiblebudget.

A.Sales-ActivityVariances

Thesevariancesmeasurehoweffectivemanagershavebeeninmeetingtheplannedlevelofsales.ThefinalthreecolumnsinEXHIBIT8-6forDominionCompanyshowthesales-activityvariances.Allunitpricesandvariablecostsareheldconstantinconstructingthemasterbudgetandtheflexiblebudget.Thedifferencesbetweentheamountsareduetothelevelofsalesactivity.Thesales-activityvarianceindicatestomanagerstheeffectofnotsellingthebudgetedsaleslevel.Marketingmanagersaretypicallyinthebestpositiontoexplainwhyactualsalesactivitiesdifferedfromplans.

B.Flexible-BudgetVariances

Flexible-budgetvariancesmeasuretheefficiencyofoperationsattheactuallevelofactivity.Thedifferencesbetweencolumns1and3inEXHIBIT8-6forDominionCompanyareflexible-budgetvariances.Thetotalflexible-budgetvarianceisthedifferencebetweentheactualincomeachievedandtheflexiblebudgetincomefortheachievedactivitylevel.Thetotalflexible-budgetvariancearisesfromsalespricesreceived,andthevariableandfixedcostsincurred.Flexible-budgetvariancesmayserveasthebasisforperiodicperformanceevaluation.Operationsmanagersareinthebestpositiontoexplainthesevariances.Thevariancesshouldnotbeusedtofixblame.Managersbeingevaluatedmayresorttocheatingtobeatthesystem.

SeeEXHIBIT8-7foranexpanded,line-by-linecomputationofflexible-budgetvariancesforDominionCompany.Thevariancesshouldbeinterpretedassignalsthatactualoperationshavenotoccurredexactlyasanticipatedwhentheflexible-budgetformulaswereset,ratherthanasbeinggoodorbad.Anycostdifferingsignificantly（materially）fromtheflexiblebudgetmustbeexplained.

C.SettingStandards

ExpectedCost—thecostthatismostlikelytobeattained.StandardCost—acarefullydevelopedcostperunitthatshouldbeobtained.StandardCostSystems—valueproductsaccordingtoonlystandardcostsandareusedforinventoryvaluationpurposes.Forplanningandcontrolpurposes,expectedfuturecostsandexpectedfutureactivitylevelsareusedtosetbudgetsandprepareperformancereports.Thestandardcostsfromthestandardcostsystemarenotnecessarilyusedbecausetheymaydifferfromtheexpectedfuturecosts.Companiesusedifferentcostsystemsforinventoryvaluation,productcostingfordecision-making,andforperformanceevaluation.

Whatstandardofexpectedperformanceshouldbeused?

PerfectionStandards（orIdealStandards）—expressionsofthemostefficientperformancepossibleunderthebestconceivableconditions,usingexistingspecificationsandequipment.Noprovisionismadeforspoilage,waste,machinebreakdowns,andsoon.Thesest