REFRESHER: FLEXIBLE BUDGET, VARIANCES, AND MANAGEMENT BY EXCEPTION.
Flexible Budget and its Variances.
A flexible budget is defined as a budget that can be easily computed for different volumes. This clearly separates the variable costs and the fixed costs. Managers can use the flexible budgets to best determine the differences between forecast sales volume and the actual sales volume. This difference is called the budget variance.
Budget variance is defined as ‘…the difference between an actual amount and a budgeted figure” (Horngren, Harrison, & Oliver, 2008, p. 1132). The variances can be interpreted as favorable or unfavorable depending on if the actual amount increases or decreases operating income.
The concept of Management By Exception being applied to the Variances.
Management By Exception is defined as directing “…executives’ attention to important differences between actual and budgeted amounts” (Horngren et al., 2008, p. 747). This means, the concept of management by exception could be used by a company to focus their attention on the most important variances discovered from the Actual Output versus the Standard Output budget.
- Horngren, C. T., Harrison, W. T., & Oliver, M. S., (2008). Accounting. (8 ed.). Prentice Hall.