Fixed budget

7/21/2019 Fixed budget

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© 2012 McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & Yuen

Flexible Budgets and

Performance AnalysisChater !!



McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 2

"earning #b$ecti%e !

Prepare a fei!lePrepare a fei!le

!ud"et#!ud"et#




Characteristics of Flexible Budgets

Planning budgetsare reared for

a single, lannedle%el of acti%ity

Performancee%aluation is difficultwhen actual acti%ity

differs from thelanned le%el of

acti%ity

'mm( Comaringstatic lanning budgets

with actual costsis li)e comaring

ales and oranges




*mro%e erformance e%aluation

+ay be reared for any acti%ityle%el in the rele%ant range

how costs that should ha%e beenincurred at the actual le%el of acti%ity, enabling -ales to ales.cost comarisons

'el managers control costs

Let’s look at Larry’s Lawn Service.

Characteristics of Flexible Budgets




"arry/s "awn er%ice ro%ides lawn care in a lannedcommunity where all lawns are aroximately the same si0e At the end of +ay, "arry reared his 1une budget based onmowing 233 lawns ince all of the lawns are similar in si0e,"arry felt that the number of lawns mowed in a month wouldbe the best way to measure o%erall acti%ity for his business

"arry/s "awn er%ice ro%ides lawn care in a lannedcommunity where all lawns are aroximately the same si0e At the end of +ay, "arry reared his 1une budget based onmowing 233 lawns ince all of the lawns are similar in si0e,

"arry felt that the number of lawns mowed in a month wouldbe the best way to measure o%erall acti%ity for his business

Larry’s Budget

4eficiencies of the tatic Planning Budget




4eficiencies of the tatic Planning BudgetLarry’s Planning Budget


http://slidepdf.com/reader/full/fixed-budget 7/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 7

4eficiencies of the tatic Planning BudgetLarry’s Actual Results



4eficiencies of the tatic Planning BudgetLarry’s Actual Results Compared with the Planning Budget




F Favora!le variance that occurs whenactual costs are less than !udgeted costs.

" "n#avora!le variance that occurs whenactual costs are greater than !udgeted costs.

F Favora!le variance that occurs when actualrevenue is greater than !udgeted revenue.




Since these variances are #avora!le$ hasLarry done a good %o! controlling costs&

Since these variances are un#avora!le$ hasLarry done a poor %o! controlling costs&



* don/t thin) *can answer the5uestions usinga static budget

Actual acti%ity is abo%elanned acti%ity

o, shouldn/t the %ariable

costs be higher if actualacti%ity is higher6

4eficiencies of the tatic Planning Budget



'ow a Flexible Budget 8or)s

7o a budget we need to )now that9

7otal %ariable costs change

in direct roortion tochanges in acti%ity

7otal fixed costs remainunchanged within the

rele%ant range Fixed

: a r i a

b l e



Let’s prepare a

!udget#or Larry’s LawnService.

Let’s prepare a !udget#or Larry’s Lawn

Service.

'ow a Flexible Budget 8or)s



Prearing a Flexible BudgetLarry’s Fle*i!le Budget



;uic) Chec)

8hat should the total wages and salaries costbe in a flexible budget for <33 lawns6

a =!>,333

b =?3,333c =?@,333

d =?2,333


a =!>,333

b =?3,333c =?@,333

d =?2,333



;uic) Chec)

8hat should be the total wages and salariescost in a flexible budget for <33 lawns6

a =!>,333

b =?3,333c =?@,333

d =?2,333

8hat should be the total wages and salariescost in a flexible budget for <33 lawns6

a =!>,333

b =?3,333c =?@,333

d =?2,333

7otal wages and salaries cost

=2,333 =@3 er lawn <33 lawnsD

=2,333 =!>,333 =?@,333


a =!>,333

b =?3,333c =?@,333

d =?2,333


a =!>,333

b =?3,333c =?@,333

d =?2,333



"earning #b$ecti%e ?

Prepare a reportPrepare a report

s$owin" acti%it&s$owin" acti%it&

%ariances#%ariances#



Acti%ity :ariances

Planning budget re%enues

and exenses

Flexiblebudget re%enues

and exenses

7he differences between7he differences betweenthe budget amounts arethe budget amounts are

called acti%ity %ariancescalled acti%ity %ariances



Let’s use !udgeting

concepts to compute activityvariances #or Larry’s Lawn Service.

Let’s use !udgeting

concepts to compute activityvariances #or Larry’s Lawn Service.

Acti%ity :ariances



Acti%ity :ariancesLarry’s Fle*i!le Budget Compared with the Planning Budget



Acti%ity :ariancesLarry’s Fle*i!le Budget Compared with the Planning Budget

Acti%ity and re%enue increase by !3 ercent, but net oerating incomeincreases by more than !3 ercent due to the resence of fixed costs



"earning #b$ecti%e @

Prepare a reportPrepare a report

s$owin" re%enue ands$owin" re%enue and

spendin" %ariances#spendin" %ariances#




Ee%enue and ending :ariances

Flexible budget re%enue Actual re%enue

+he di##erence is a revenue variance.+he di##erence is a revenue variance.

Flexible budget cost Actual cost

+he di##erence is a spending variance.+he di##erence is a spending variance.




,ow$ let’s use !udgeting

concepts to compute revenue andspending variances #or Larry’s Lawn

Service.


concepts to compute revenue andspending variances #or Larry’s Lawn

Service.





Ee%enue and ending :ariancesLarry’s Fle*i!le Budget Compared with the Actual Results

-$/01 #avora!le-$/01 #avora!le

revenue variancerevenue variance




Larry’s Fle*i!le Budget Compared with the Actual Results


Spendingvariances




"earning #b$ecti%e

Prepare a per'orancePrepare a per'orance

report t$at co!inesreport t$at co!ines

acti%it& %ariances andacti%it& %ariances and

re%enue and spendin"re%enue and spendin"%ariances#%ariances#





concepts to com!ine the revenue andspending variances reports #or Larry’s

Lawn Service.


concepts to com!ine the revenue andspending variances reports #or Larry’s

Lawn Service.

A Performance Eeort Combining Acti%ityand Ee%enue and ending :ariances





23 lawns =H2 er lawn 23 lawns =@3 er lawn





=@,333 actual I =!,?23 budget




Performance Eeorts in NonIProfit#rgani0ations

NonIrofit organi0ations may recei%e funding fromsources other than the sale of goods and ser%ices,

so re%enues may consist of both fixed and

%ariable elements

NonIrofit organi0ations may recei%e funding fromsources other than the sale of goods and ser%ices,

so re%enues may consist of both fixed and

%ariable elements

Jni%ersities

7uition and fees

4onationstate funding

Kndowments




Performance Eeorts in Cost Centers

Performance reorts are often rearedfor cost centers 7hese reorts should be

reared using the same rinciles

discussed so far, excet for the fact thatthese reorts will not contain re%enue or

net oerating income %ariances

Performance reorts are often rearedfor cost centers 7hese reorts should be

reared using the same rinciles

discussed so far, excet for the fact thatthese reorts will not contain re%enue or

net oerating income %ariances




"earning #b$ecti%e 2

Prepare a fei!lePrepare a fei!le

!ud"et wit$ ore t$an!ud"et wit$ ore t$an

one cost dri%er#one cost dri%er#




2ore than one costdriver may !e needed toade3uately e*plain all o#

the costs in an organi4ation.

2ore than one costdriver may !e needed toade3uately e*plain all o#

the costs in an organi4ation.

+he cost #ormulas used

to prepare a #le*i!le!udget can !e ad%ustedto recogni4e multiple

cost drivers.

+he cost #ormulas usedto prepare a #le*i!le

!udget can !e ad%ustedto recogni4e multiple

cost drivers.

Flexible Budgets with +ultile Cost 4ri%ers




Because of the large unfa%orable wages and salaries sending%ariance, "arry decided to add an additional cost dri%er for

wages and salaries 7he %ariance is due rimarily to the numberof hours re5uired for the additional edging and trimming o

"arry estimates the additional hours and builds those hours intoboth his re%enue and exense budget formulas

Because of the large unfa%orable wages and salaries sending%ariance, "arry decided to add an additional cost dri%er for

wages and salaries 7he %ariance is due rimarily to the numberof hours re5uired for the additional edging and trimming o

"arry estimates the additional hours and builds those hours intoboth his re%enue and exense budget formulas

Larry’s ,ew Budget






Larry’s Budget Based on 2ore than 5ne Cost 6river




"earning #b$ecti%e <

nderstand coonnderstand coon

errors ade inerrors ade in

preparin" per'orancepreparin" per'orance

reports !ased onreports !ased on!ud"ets and actual!ud"ets and actual

results#results#




ome Common Krrors

7he most common errors in rearing erformancereorts are to imlicitly assume that9! All costs are fixed or that? All costs are %ariable

7he most common errors in rearing erformancereorts are to imlicitly assume that9! All costs are fixed or that? All costs are %ariable

Assume all costs are #i*ed.




Common Krror !9 Assuming All Costs AreFixed

Faulty Analysis Comparing Budgeted Amounts to Actual Amounts




Common Krror ?9 Assuming All Costs Are:ariableFaulty Analysis that Assumes All !udget 7tems Are 8aria!le



Knd of Chater !!

Fixed budget

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