09: Variable Cost and Overhead

6. Although you are basically satisfied with the analysis thus far, you are concerned about the

Use of the flexible budget shows the budgeted operating income given the actual sales. When you compare the flexible budget to the actual budget you are able to compare the total sales and cost incurred given the same units sold. The sales price variance, which is the actual sales less the flexible budgeted sales, was $14,700 favorable. This means that actual sales were higher than budgeted sales at that usage. This is attributable to the increase in service price from $25 to $26.40. Price variance for material usage was $2,100 over the flexible budget projection. This could be attributed to overuse or waste of materials. As expected, the direct labor price variance was $3,375 lower than the flexible budget amount. This is attributed to the manager’s effective use of labor. Operating expenses were also higher than the flexible budget

For example interest rates, the cost of raw materials including fuel, the number of sales or orders that we make and in turn all of these rely on other factors. The best therefore that can be done when developing a budget is to look at all the factors that are likely to affect the budget and decide how to take account of each one. If there is a previous budget (last year or last month) then it is sensible to look at how this has been achieved or not as the case may be, and what factors affected the outcome. If we are looking at monthly budgets it might be a better comparison to look at the same month twelve months ago as well as the previous months. The more factors we take into consideration when estimating a budget, the more accurate our budget will be.

Since a company’s’ budget is typically based on knowledge from their financial history therefore, if a budget variance occurs, it can be because inaccurate estimates were done, or one or more factors have changed unexpectedly, and the company need to make some type of adjustments to their budget. Once a company discovered a significant budget variance, they will need to identify the cause, and address it accordingly. For example,

2. Follow this up with computing 95% confidence intervals for each of the variables described in a.-d., and again interpreting these intervals.

1. After obtaining an understanding of the clients internal controls, the auditor may choose to test some of the controls. If the results of those tests are satisfactory, the auditor may then rely on those controls. What is the primary reason for relying on controls? What are the other potential benefits from testing controls?

Various terms are used to describe costs. Having an understanding of these terms will provide a better insight to managers and companies on making budget decisions, efficiently. Not only the ones described above should be considered, but also all types of costs related to the decision in effect. Efficient managers will considered all aspects related to the analyses in question.

Which of the following statements is a good description of the variances that should be investigated under the management by exception concept?

Evaluate how managing resources and controlling budget costs can improve the performance of a business. (D1)

Companies will have set guidelines to trigger the need for a variance report such as variances over a specific percentage or dollar amount. (Cleverly, Song, & Cleverly, 2011, Pg. 381) In an analysis of revenues, a negative variation is unfavorable; in an analysis of costs, a negative variation is favorable. (Dove & Forthman, 1995) Variation is calculated by subtracting the expected or budgeted figure from the actual figure for each variable. The variable figure is then divided by the expected figure in order to establish a percentage of the variance. Wages that are over the budgeted amount would be an unfavorable variance and would be an indication that there is a need for a variance report. (Dove & Forthman, 1995) Supply costs being less than the budgeted amount would be a favorable variance, however it could result in the supplies budget being reduced if there is not a reasonable explanation as to the cause for the variance. Therefore, a variable department manager would ask for a variance report detailing the reason for the variance to be completed, otherwise it appears as if the budget is overstated and needs to be reduced.

In the Cost of Goods Sold area, the variance is $2,000. Here, they should rethink their strategy in their budget. They should make sure that their budget is enough to cover the actual expense of their products and have more budget in the next order.

How can the total flexible-budget variance be broken down (i.e., what are the constituent parts of this total variance)?

Throughout the testing that is being conduct, the auditor will have a determined tolerable deviation (error) rate. During or after the testing has been conducted, the auditor has to compare the maximum deviation rate to their tolerable deviation rate. As a result, if the maximum deviation rate is lower or equal to the tolerable deviation rate, the auditor can conclude that the control is working effectively. In addition, the auditor will want to use a sampling method to ensure that the control is working effectively. If, at any time, the maximum deviation rate was high than the tolerable deviation rate, the auditor will have to decide if the testing should be concluded with an ineffective control or the sampling size should be increased.

c) Variability in the samples can be reduced by increasing precision and accuracy, which in turn can be influenced through following two factors; such as:

3. Budgets are prepared for the future period which is always uncertain. In future, conditions may change which will upset the budgets. Thus, future uncertainties minimize the utility of budgetary control system.