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Flexible Budget and Standard Costs: DQ 21-13

The relations among management by exception, variance analysis, flexible budgets, and standard cost are that they all focus on the effectiveness and efficiency or a company. Management by exception is the practice of concentrating on areas not operating as expected and giving less attention to areas operating as expected. The larger the variance, the more likely the area is not operating as expected. Variances assist managers in their planning and control decisions. Variance analysis helps managers identify areas not operating as expected. The flexible budget, also known as the variable budget, is based on several different amounts of sales or other activity measures. It recognizes that there can be fluctuations in output and hence expenses also vary in a month or a year. Unlike a static budget, a flexible budget can recognized that, if output goes down, the manager of a department has to decrease variable expenses and similarly to if output goes up, then an increase to spending. This helps identify the output per area so managers know which areas are not operating as expected. In a variance analysis, a standard cost performance sheet is prepared followed by computing and analyzing variances. This helps highlight operations not proceeding to plan. We then form a corrective and strategic action to solve the problem under management by exception. When combining all of these into a system, we control price decisions, cost management, and budgetary planning and control.