Decision Points

The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.

Decision

Guidelines

  1. What are static budgets and static-budget variances?

A static budget is based on the level of output planned at the start of the budget period. The static-budget variance is the difference between the actual result and the corresponding budgeted amount in the static budget.

  1. How can managers develop a flexible budget, and why is it useful to do so?

A flexible budget is adjusted (flexed) to calculate what the budget would have been for the actual output level. When all costs are either variable or fixed with respect to output, the flexible budget requires information about the budgeted selling price, budgeted variable cost per output unit, budgeted fixed costs, and actual quantity of output units. Flexible budgets help managers gain more insight into the causes of variances than is available from static budgets.

  1. How are flexible-budget and sales-volume variances calculated?

The static-budget variance can be subdivided into a flexible-budget variance (the difference between the actual result and the corresponding flexible-budget amount) and a sales-volume variance (the difference between the flexible-budget amount and the corresponding static-budget amount).

  1. What is a standard cost, and what are its purposes?

A standard cost is a carefully determined cost used as a benchmark for judging performance. The purposes of a standard cost are to exclude past inefficiencies and to take into account changes expected to occur in the budget period.

  1. Why should a company calculate price and efficiency variances?

Price and efficiency variances help managers gain insight into two different—but not independent—aspects of performance. The price variance focuses on the difference between the actual input price and the budgeted input price. The efficiency variance focuses on the difference between the actual quantity of input and the budgeted quantity of input allowed for actual output.

  1. How do managers use variances?

Managers use variances for control, decision making, performance evaluation, organization learning, and continuous improvement. When using variances, managers should consider several variances together rather than focus only on an individual variance.

  1. What is benchmarking, and why is it useful?

Benchmarking compares a firm’s performance against the best levels of performance in competing companies or companies with similar processes to measure how well a company and its managers are doing.