1. Demonstrate how budget credibility can be assessed. To assess the credibility of budgets, managers frequently compare projected outcomes to past performance. Comparative financial statements and ratio analysis are common techniques used to evaluate assumptions and calculations underlying final budget projections. Using these assessment techniques, managers can examine their projections for reasonableness and identify items requiring possible revision.
   
   
2. Illustrate the development of flexible budgets. To create a flexible budget, managers must identify how costs react to changing levels of activity. Specifically, managers must determine how sensitive their budgets are to changes in such core assumptions as sales price, sales volume, and/or cost estimates. Changing core assumptions and their estimated values will provide managers with information about the sensitivity of projected profits at different estimated activity levels. Flexible budgeting creates a new set of budgeted expectations that more accurately reflect actual levels of activity.
   
   
3. Discuss how financial statement variances are computed and interpreted. Financial statement variances are computed by comparing actual to budgeted results for each amount on the company's financial statements. These variances are expressed as the difference between the actual and budgeted dollar amounts. A percentage variance is the dollar difference expressed as a percentage of the original budget amount. Financial statement variances help managers investigate why actual performance exceeded or failed to meet budgeted expectations.
   
   
4. Explain the use of revenue variance analysis. Revenue variance analysis is used to assess why actual sales are greater or less than budgeted sales. Total revenue variances can be computed by subtracting budgeted sales from actual sales. Favorable revenue variances occur when actual sales exceed budget expectations. The two primary types of revenue variance are revenue volume variance and revenue price variance. Managers must examine each of these revenue variances separately to fully understand the effects of volume and price on business performance.
   
   
5. Demonstrate the use of cost variance analysis. Fixed and variable cost analysis evaluates the variances that arise when the price or quantity of inputs does not meet budget expectations. Favorable cost variances occur when costs fall below budget expectations. Since fixed and variable costs behave differently, managers must investigate each type of variance separately.