Financial Management and Budgeting
This domain tests budget construction, variance interpretation, cost behavior, and capital decisions. Exam items often require you to separate volume effects from price and spending effects rather than labeling every variance favorable or unfavorable at face value.
Core rules and concepts
- Operating budgets cover recurring revenue and expenses; capital budgets cover long-lived assets and usually require ROI, payback, and cash-flow review. Misclassifying a capital purchase as operating distorts both.
- Use a flexible budget for cost control: compare actual results with the budget reset to actual volume. A static-budget comparison mixes volume and performance.
- Contribution margin equals revenue minus variable costs. Break-even volume equals fixed costs divided by contribution margin per unit.
- Variance analysis: price/rate variance = (actual price - budgeted price) × actual quantity; volume variance = (actual volume - budgeted volume) × budgeted contribution margin.
Worked example
Budget: 5,000 visits, revenue $500,000 ($100 each), supplies $50,000 ($10 each), fixed costs $300,000; budgeted profit $150,000. Actual: 5,500 visits, revenue $522,500 ($95 each), supplies $60,500 ($11 each), fixed costs $305,000; actual profit $157,000. Flexible budget at 5,500 visits: revenue $550,000, supplies $55,000, fixed $300,000; profit $195,000. Volume variance is +$45,000 (flexible minus static profit). Price variance is ($95 - $100) × 5,500 = -$27,500. Supply price variance is ($11 - $10) × 5,500 = -$5,500. Fixed spending variance is -$5,000. Sum: +$45,000 - $27,500 - $5,500 - $5,000 = +$7,000, matching actual versus static profit. Reasoning: favorable total masks unfavorable pricing and fixed overspend.
Traps that cost marks
Treating a favorable expense variance as always good (it may signal understaffing or deferred maintenance); comparing actuals with a static budget; mixing capital and operating; ignoring volume; forgetting benefit load in labor cost.