Flexible budgeting is a financial tool that adjusts the original master budget based on actual sales or production levels. It provides a more accurate reflection of costs and revenues by incorporating different activity levels. This allows for better performance evaluation and cost control.
Perf...
,than expected for the actual level of driver and one based on two cost drivers
activity. An unfavorable spending variance is the cost formulas. When there are two
occurs because the cost is higher than cost drivers, some costs may be a function
expected for the actual level of activity. of the first cost driver, some costs may be
a function of the second cost driver, and
10-8 In a flexible budget performance some costs may be a function of both cost
report, the static planning budget is not drivers.
directly compared to actual results. The
flexible budget is interposed between the 10-10 When the static planning budget is
static planning budget and actual results. directly compared to actual results, it is
The differences between the static implicitly assumed that costs (and
planning budget and the flexible budget revenues) should not change with a
are activity variances. The differences change in the level of activity. This
between the flexible budget and the assumption is valid only for fixed costs.
actual results are the revenue and However, it is unlikely that all costs are
spending variances. The flexible budget fixed. Some are likely to be variable or
performance report cleanly separates the mixed.
differences between the static planning
budget and the actual results that are due 10-11 When the static planning budget is
to changes in activity (the activity adjusted proportionately for a change in
variances) from the differences that are activity and then directly compared to
due to changes in prices and the actual results, it is implicitly assumed that
effectiveness with which resources are costs should change in proportion to a
managed (the revenue and spending change in the level of activity. This
variances). assumption is valid only for strictly
variable costs. However, it is unlikely that
10-9 The only difference between a all costs are strictly variable. Some are
flexible budget based on a single cost likely to be fixed or mixed.
Flight Café
Activity Variances
For the Month Ended July 31
Plannin Activity
g Flexible Varianc
Budget Budget es
Meals...................................... 18,000 17,800
Revenue ($4.50q)................... $81,000 $80,100 $900 U
Expenses:
Raw materials ($2.40q)........ 43,200 42,720 480 F
Wages and salaries
($5,200 + $0.30q).............. 10,600 10,540 60 F
Utilities ($2,400 + $0.05q). . . 3,300 3,290 10 F
Facility rent ($4,300)............ 4,300 4,300 0
Insurance ($2,300)............... 2,300 2,300 0
Miscellaneous ($680 +
$0.10q).............................. 2,480 2,460 20 F
Total expense......................... 66,180 65,610 570 F
Net operating income............. $14,820 $14,490 $330 U
2. Management should be concerned that the level of activity fell
below what had been planned for the month. This led to an
expected decline in profits of $330. However, the individual
items on the report should not receive much management
attention. The unfavorable variance for revenue and the
favorable variances for expenses are entirely caused by the
drop in activity.
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