220 Understanding the Numbers
“Since the static and the f lexible budgets for fixed costs are identical, the
fixed-cost spending variance is simply the difference between the actual and
the original budget. The spending index for fixed costs is their quotient.
“In the case of variable costs and revenues, a few simple rules emerge.
The ratio between the f lexible and the static budgets indicates the difference
in the quantities expected and the quantities actually experienced. The ratio
between the actual results and the f lexible budget indicates the change in costs
or revenues that can be attributed to changes in unit costs or selling prices.
“In the case of multiple outputs or multiple inputs, the quantity indices
can be further refined. They break into at least two indices. The first reveals
the effect of changing mixes of either outputs or inputs. The second reveals
the effect of changing the overall volume. The mix variance may be computed
directly or simply by dividing the quantity index by the volume index. In the
case of variable costs, it is usually possible to draw out another index indicating
the total yield, that is, the amount of input required to produce a given amount
of output.
“All these indices can be computed using an accounting system that col-
lects only actual costs and comparing these in a spreadsheet with the budgeted
costs. Alternatively, they may be derived by keeping a standard cost system.
The variances that emerge as one enters standard costs into work-in-process
and credits the corresponding asset or liability account at actual are identical
to those derived from a f lexible budgeting control system. The one exception
to this identity is fixed costs, but the difference here is easily reconciled.
“In short, budgetary control analysis provides one vehicle for controlling
a business. The budget ref lects, ideally, a company’s strategies and objectives.
As actual results emerge they are compared with the budget to see to what ex-
tent the enterprise has met its goals and productivity targets. Any difference
encountered can be decomposed to determine whether it was due to a change
in usage or a change in price. Where inputs or outputs are substitutable, one
can also examine the changing mix for further insight into how one achieved
one’s goals.
“In each case, the index derived is neither good nor bad. It simply indi-
cates a change. As noted earlier, the same rise in sales may be a matter for con-
gratulation when markets are declining and a matter for concern when markets
are expanding faster than one’s sales. All that the index does is to point one to
where still more information must be gathered.”
FOR FURTHER READING
Anthony, Robert N., David F. Hawkins, and Kenneth A. Merchant, Accounting: Text
and Cases,10th ed. (New York: Ir win/McGraw-Hill, 1999), esp. chs. 19 and 20.
Davidson, Sidney, and Roman L. Weil, Handbook of Cost Accounting(New York:
McGraw-Hill, 1978), esp. chs. 15 and 16.