Question

Discussion: Direct Cost Variances & Flexible Budgets

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The executive vice president of the company observed that the operating income for September was much lower than anticipated, despite a higher-than-budgeted selling price and a lower-than-budgeted variable cost per unit. The manager is threatening to withhold year-end bonuses unless an explanation is presented. As the company’s management accountant, you have been asked to provide explanations for the disappointing September results. How can the data be presented to show that the managers did control the costs that were controllable?

Participation in this discussion provides you with the opportunity to use concepts and terminology learned in this Module while exchanging information with peers and your professor.

Answer 1

Direct cost variance is the difference between actual direct cost incurred and budgeted direct cost.

Flexible budget means dynamic budget.it is designed to change in accordance with the level of activity attained.

• It is an important tool of planning and control costs.

It is useful in an uncertain and unpredictable environment. These budgets indicate the range within which cost may be expected to vary.

Reason for disappointing september result is cost which are uncontrollable. Those are depreciation, Rent expense,insurance, administration overheads or all other fixed expenses

Where controllable costs are direct materials, direct labor, indirect materials, and indirect labor. The data related to these controllable costs are shown in flexible budget.

Flexible budget show that the managers did control the costs that were controllable.