Performance Measurement & Variance Analysis Flashcards

What is the purpose of a variance analysis report in budget management?

Answer: To explain differences between budgeted and actual financial results

Variance analysis reports identify and explain deviations between planned (budgeted) and actual results, helping management understand performance and take corrective action.

A company budgeted $500,000 in sales but achieved $480,000. How is this variance classified?

Answer: Unfavorable, $20,000

When actual revenue is below the budget target, the variance is unfavorable because the organization performed worse than planned by $20,000.

Which budgeting method establishes performance targets based on prior-period spending plus an incremental adjustment?

Answer: Incremental budgeting

Incremental budgeting starts with the prior year's figures and adds or subtracts a percentage to arrive at the new budget, making it the most common and simplest method.

In flexible budget variance analysis, the 'activity variance' measures the effect of:

Answer: Operating at a different volume than originally planned

The activity variance (also called the volume variance) captures the financial impact of actual production or service volume differing from the original static budget volume.

A return on investment (ROI) metric is best used in performance measurement to evaluate:

Answer: How effectively capital was deployed to generate profit

ROI measures the profitability of an investment relative to its cost, making it a key metric for assessing how well capital resources are being utilized.

Which document formally compares budgeted versus actual figures and identifies causes of variances for management review?

Answer: Budget-to-actual report

A budget-to-actual report (also called a budget performance report) is the primary tool for comparing planned financial targets to actual results within a reporting period.

Which concept describes a budgeting approach where new budgets are prepared continuously, adding a future period as each current period ends?

Answer: Rolling (continuous) budgeting

Rolling budgets are continuously updated by adding a new period (e.g., a month or quarter) as the current period concludes, keeping the planning horizon constant.