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Flexible Budgets

Flexible Budgets. Managerial Accounting David Fender. Larry’s Lawn Mower Service. Deficiencies of the Static Planning Budget. Larry’s Planning Budget. Deficiencies of the Static Planning Budget. Larry’s Actual Results. Deficiencies of the Static Planning Budget.

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Flexible Budgets

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  1. Flexible Budgets Managerial Accounting David Fender

  2. Larry’s Lawn Mower Service

  3. Deficiencies of the Static Planning Budget Larry’s Planning Budget

  4. Deficiencies of the Static Planning Budget Larry’s Actual Results

  5. Deficiencies of the Static Planning Budget Larry’s Actual Results Compared with the Planning Budget

  6. I don’t think Ican answer thequestions usinga static budget. Actual activity is above planned activity. So, shouldn’t the variablecosts be higher if actualactivity is higher? Deficiencies of the Static Planning Budget

  7. Flexible Budgets

  8. Flexible Budgets Static budgetsare prepared for a single, planned levelof activity. Flexible budgets are adjusted budgets to the actual level of output (activity) Hmm! Comparingstatic budgetswith actual costsis like comparingapples and oranges.

  9. The relevant question is . . . “How much of the cost variances is due to higher activity, and how much is due to cost control?” To answer the question,we mustthe budget to theactual level of activity. Deficiencies of the Static Planning Budget

  10. How to prep a flex budget? • Create a budget for a the actual level of activity • Meaning: • Take ex post the actual level of performance • Create a budget for that level of performance

  11. Deficiencies of the Static Planning Budget Larry’s Planning Budget

  12. Preparing a Flexible Budget Larry’s Flexible Budget

  13. May be prepared for any activity level in the relevant range. Show costs that should have beenincurred at the actual level ofactivity, enabling “apples to apples”cost comparisons. Help managers control costs. Improve performance evaluation. Characteristics of Flexible Budgets Flexible Budget

  14. Variable Fixed Preparing a Flexible Budget To flex a budget for different activity levels, we must know how costs behave with changes in activity levels. • Total variablecosts changein direct proportion to changes in activity. • Total fixedcosts remainunchanged within therelevant range.

  15. Preparing a Flexible Budget Larry’s Flexible Budget

  16. Flexible Budgets with Multiple Cost Drivers More than one cost driver may be needed toadequately explain all ofthe costs in an organization. The cost formulas usedto prepare a flexiblebudget can be adjustedto recognize multiplecost drivers.

  17. Larry’s New Budget Flexible Budgets with Multiple Cost Drivers Because of the large unfavorable wages and salaries spendingvariance, Larry decided to add an additional cost driver for wages and salaries. The variance is due primarily to the number of hours required for the additional edging and trimming. So Larry estimates the additional hours and builds those hours into both his revenue and expense budget formulas.

  18. Flexible Budgets with Multiple Cost Drivers Larry’s Budget Based on More than One Cost Driver

  19. Some Common Errors • The most common errors in preparing performancereports are to implicitly assume that:1. All costs are fixed or that • All costs are variable.

  20. Your turn: Prepare a flexible budget for 6,000 units

  21. Variances

  22. Activity Variances Planning budget revenues and expenses Flexible budget revenuesand expenses The differences between the budget amounts are called activity variances.

  23. Activity Variance Activity Variance: Is the difference in cost between budgeted costs for original level of output and flex budget output at actual level

  24. Activity Variances Larry’s Flexible Budget Compared with the Planning Budget

  25. Activity Variances Larry’s Flexible Budget Compared with the Planning Budget Activity and revenue increase by 10 percent, but net operating income increases by more than 10 percent due to the presence of fixed costs.

  26. Revenue and Spending Variances

  27. Revenue and Spending Variances Flexible budget revenue Actual revenue The difference is a revenue variance. Flexible budget cost Actual cost The difference is a spending variance.

  28. Revenue and Spending Variance Revenue Variance: Is the difference between budgeted revenue in the flexible budget and actual revenue Spending Variance: Is the difference between budgeted costs in the flexible budget and actual costs

  29. Combining Activity and Revenue and Spending Variances

  30. Revenue and Spending Variances Larry’s Flexible Budget Compared with the Actual Results $1,750 favorablerevenue variance

  31. Revenue and Spending Variances Larry’s Flexible Budget Compared with the Actual Results Spending variances

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