Final answer:
The flexible-budget variance for direct costs can be broken down into a price variance and an efficiency variance. Price variance assesses cost discrepancies, while efficiency variance looks at quantity discrepancies in relation to output.
Step-by-step explanation:
The flexible-budget variance for direct cost inputs can be further subdivided into a price variance and an efficiency variance. Price variance is the difference between the actual cost of inputs and the expected cost of inputs. The efficiency variance, on the other hand, measures the difference between the actual quantity of inputs used and the amount that should have been used, given the output level.
Understanding these variances is essential for a firm as it allows for the evaluation of performance and identification of areas needing improvement. Firms can analyze their cost structures using fixed and variable costs, where fixed costs are the same regardless of production levels, such as rent, and variable costs fluctuate with output levels, such as labor and raw materials.