Prepared by Diane Tanner University of North Florida

1. Chapter 7 Flexible Vs. Static Budgets Prepared by Diane Tanner University of North Florida

2. Not adjusted for actual level of production Static and Flexible Budgets 2 Static Budget Flexible Budget Budget that can be adjusted to various activity levels Which is best for use in performance analysis? 2

3. Static Budget 3 • The initial budget prepared at the estimated level of activity, before the period begins • Prepared for a single level of activity • Difficult to compare actual costs at a differentactivity level to a static budget • Why? Total variable costs change at different levels of activity, while amounts on a static budget are for one level of activity 3

4. Flexible Budgets 4 • A budget that is adjusted for changes in activity such as sales volume • Can be applied to any cost center or profit center budget • Costs are often divided into variable and fixed components • Variable portion • Determined by multiplying the budgeted variable cost per unit times the actual number of units produced and sold • Fixed portion • Represents the budgeted fixed costs and remains constant at every activity level 4

5. 5 Using Budgets for Performance Evaluation • When comparing actual activity to budgeted activity, both activity levels must be the same. • Static budget • Prepared for a single level of activity • The initial estimated budget level • Flexible budget • Prepared for the level of activity actually achieved at the end of the accounting period • Eliminates the problem of comparing actual costs at one activity level to budgeted costs for a different level 5

6. The End