In this chapter, students will be able to understand: Use budgets for performance evaluation; develop and use flexible budgets; compute and interpret the sales activity variance; prepare and use a profit variance analysis; compute and use variable cost variances; compute and use fixed cost variances; from the appendix, understand how to record costs in a standard costing system. | Fundamentals of Variance Analysis Chapter 16 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin In Chapter 13 we discussed the development of the master budget as a first step in the budgetary planning and control cycle. The budgeting process provides a means to coordinate activities among units of the organization, to communicate the organization’s goals to individual units, and to ensure adequate resources are available to carry out planned activities. While this planning aspect of the budget is important, it is not the only role budgets can play. In the control and evaluation activity, the performance of units and managers is evaluated and actions are taken in an attempt to improve performance. As we discussed in Chapter 14, evaluation requires a benchmark against which to measure performance. One benchmark for measuring performance is the budget. In this chapter, and in Chapter 17, we use the budgets to evaluate performance. Using Budgets for Performance Evaluation . 1 Use budgets for performance evaluation. Operating budgets: Budgeted income statement, production budget, budgeted cost of goods sold, and supporting budgets Financial budgets: Budgets of financial resources; for example, the cash budget and the budgeted balance sheet Variance: Difference between planned result and actual outcome 16 - The master budget that we prepared in Chapter 13 included operating budgets, a budgeted income statement, production budget, budgeted cost of goods sold, and supporting budgets and financial budgets that identify financial resources; for example, the cash budget and the budgeted balance sheet. In performance evaluation, we study variances and the difference between planned and actual results. Profit Variance LO1 Bayou Division Budget and Actual Results August Sales (units) Sales revenue Less: Variable costs Variable mfg. costs Variable selling and administrative Total variable costs Contribution margin Fixed . | Fundamentals of Variance Analysis Chapter 16 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin In Chapter 13 we discussed the development of the master budget as a first step in the budgetary planning and control cycle. The budgeting process provides a means to coordinate activities among units of the organization, to communicate the organization’s goals to individual units, and to ensure adequate resources are available to carry out planned activities. While this planning aspect of the budget is important, it is not the only role budgets can play. In the control and evaluation activity, the performance of units and managers is evaluated and actions are taken in an attempt to improve performance. As we discussed in Chapter 14, evaluation requires a benchmark against which to measure performance. One benchmark for measuring performance is the budget. In this chapter, and in Chapter 17, we use the budgets to evaluate performance. Using .
