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Chapter 7: Flexible Budgets, Direct-Cost Variances, and Management Control

What distinguishes between a favorable variance and an unfavorable variance?
A favorable variance has a result of increasing operating income relative to the budgeted amount. An unfavorable variance has a result of decreasing operating income relative to the budgeted amount
What is the relationship between management by exception and variance analysis?
Management by exception is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected. Variance analysis helps managers identify areas not operating as expected
What is the key difference between a static budget and a flexible budget?
a static budget is based on the level of output at the beginning of the period; a static budget is based on the actual output level in the budget period
Why might managers find a flexible budget analysis more informative than a static budget analysis?
A FBA enables a manager to distinguish how of the difference between an actual result and a budgeted amount is due to the difference between actual and budgeted output levels and the difference between actual and budgeted selling prices, variable costs and fixed costs
What best describes the steps in developing a flexible budget?
Identify the actual quantity of output
Calculate the flexible budget for revenues based on budgeted selling prices and actual quantity of output
Calculate the flexible budget for costs based on budgeted variable cost per output standard quantity of output and budgeted fixed costs
What are the reasons for using standard costs?
Pricing decisions
cost management
budgetary planning and control
What causes a favorable direct materials price variance?
Materials prices decrease unexpectedly due to industry oversupply
How might a manager gain insight into the cause of a flexible budget variance for direct materials?
A manager should subdivide the flexible budget variance for direct materials into a price variance and an efficiency variance. The individual causes of these variances can then be investigated recognizing possible interdependencies across these individual causes

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