Revised Fall 2012

CHAPTER 8 FLEXIBLE BUDGETS, STANDARD COSTS, AND VARIANCE ANALYSIS
Key Terms and Concepts to Know
Static or Planning Budgets  Used for planning purposes  Prepared at the beginning of the period  Based on one projected level of activity Flexible Budgets  Used for control purposes  Prepared at the end of the period  “Flexed” to accommodate actual level of production  Use costs (variable and fixed) and revenue formulas from static budgets Revenue Variance  Difference between how much the revenue should have been at the actual level of activity and the actual revenue for the period.  Favorable revenue variance occurs when the revenue is greater than expected at the actual level of activity for the period.  Unfavorable revenue variance occurs when the revenue is less than expected at the actual level of activity for the period. Spending Variance  Difference between how much anexpense should have been at the actual level of activity and the actual amount of expense incurred.  Favorable spending variance occurs when the cost is less than expected at the actual level of activity for the period.  Unfavorable spending variance occurs when the cost is greater than expectedat the actual level of activity for the period.

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Revised Fall 2012

Standards:  Standards are benchmarks or “norms” for measuring performance. Standards relate to the quantity and costs of inputs used in manufacturing goods or providing services.  Price Standards specify how much should be paid for each unit of the input.  Quantity Standards specify how much of an input such as raw material should be used to make a product or provide service. Standard Costing:  Standard costing allows companies to compare the actual results to expected or standard results and to analyze the differences or variances between them.  If there is a significant variance