Post on 31-Dec-2015
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Slide 2
Characteristics of Flexible Budgets
Planning budgetsare prepared fora single, plannedlevel of activity.
Performance evaluation is difficult when actual activity
differs from the planned level of
activity.
Hmm! Comparingstatic planning budgets
with actual costsis like comparing
apples and oranges.
Slide 3
Improve performance evaluation.
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.
Let’s look at Larry’s Lawn Service.
Characteristics of Flexible Budgets
Slide 4
Larry’s Lawn Service provides lawn care in a planned community where all lawns are approximately the same size.At the end of May, Larry prepared his June budget based onmowing 500 lawns. Since all of the lawns are similar in size,Larry felt that the number of lawns mowed in a month wouldbe the best way to measure overall activity for his business.
Larry’s Lawn Service provides lawn care in a planned community where all lawns are approximately the same size.At the end of May, Larry prepared his June budget based onmowing 500 lawns. Since all of the lawns are similar in size,Larry felt that the number of lawns mowed in a month wouldbe the best way to measure overall activity for his business.
Larry’s Budget
Deficiencies of the Static Planning Budget
Slide 7
Deficiencies of the Static Planning BudgetLarry’s Actual Results Compared with the Planning Budget
Slide 8
Deficiencies of the Static Planning BudgetLarry’s Actual Results Compared with the Planning Budget
F = Favorable variance that occurs when actual costs are less than budgeted costs.
U = Unfavorable variance that occurs when actual costs are greater than budgeted costs.
F = Favorable variance that occurs when actual revenue is greater than budgeted revenue.
Slide 9
Deficiencies of the Static Planning BudgetLarry’s Actual Results Compared with the Planning Budget
Since these variances are favorable, has Larry done a good job controlling costs?
Since these variances are unfavorable, has Larry done a poor job controlling costs?
Slide 10
I don’t think Ican answer thequestions usinga static budget.
Actual activity is above planned activity.
So, shouldn’t the variablecosts be higher if actual
activity is higher?
Deficiencies of the Static Planning Budget
Slide 11
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.
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
Slide 12
How a Flexible Budget Works
To a budget we need to know that: Total variable costs change
in direct proportion to changes in activity.
Total fixed costs remainunchanged within therelevant range. Fixed
Variable
Slide 13
Let’s prepare a budget
for Larry’s Lawn Service.
Let’s prepare a budget
for Larry’s Lawn Service.
How a Flexible Budget Works
Slide 15
Activity Variances
Planning budget revenues
and expenses
Flexible budget revenues
and expenses
The differences between The differences between the budget amounts are the budget amounts are called activity variances.called activity variances.
Slide 16
Let’s use budgeting
concepts to compute activity variances for Larry’s Lawn Service.
Let’s use budgeting
concepts to compute activity variances for Larry’s Lawn Service.
Activity Variances
Slide 18
Activity VariancesLarry’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.
Slide 19
Learning Objective 3
Prepare a report Prepare a report showing revenue and showing revenue and spending variances.spending variances.
Slide 20
Revenue and Spending Variances
Flexible budget revenue Actual revenue
The difference is a revenue variance.The difference is a revenue variance.
Flexible budget cost Actual cost
The difference is a spending variance.The difference is a spending variance.
Slide 21
Now, let’s use budgeting
concepts to compute revenue and spending variances for Larry’s Lawn
Service.
Now, let’s use budgeting
concepts to compute revenue and spending variances for Larry’s Lawn
Service.
Revenue and Spending Variances
Slide 22
Revenue and Spending VariancesLarry’s Flexible Budget Compared with the Actual Results
$1,750 favorable$1,750 favorablerevenue variancerevenue variance