Chapter 9- Flexible Budgets and Performance Analysis BMGT221

Activity variances

differences between the flexible budget and the planning budget solely because the actual level of activity differed from what was expected.

Revenue Variances

the difference between the actual total revenue and what the total revenue should have been, given the level of activity for the period.

Spending variance

the difference between the actual amount of the cost and what the cost should have been, given the level of activity for the period.

Flexible Budgets and Performance Evaluation

• Before: create a planning budget.

• During: measure the actual of activity.

• After:

  1. Prepare a flexible budget

  2. Calculate activity variances: Flexible vs. Planning Budget

  3. Calculate revenue/spending variances: Flexible vs. Actual Results

  4. Prepare a Performance Report: activity variances, revenue/spending variances.

Characteristics of Flexible Budgets

• May be prepared for any activity level in the relevant range.

• Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparison.

• Help managers control costs.

• Improve performance evaluation.

Deficiencies of the Static Planning Budget

• May not accurately reflect actual activity levels.

• Unable to adjust to changes in activity.

• Doesn't provide accurate performance evaluation when activity levels differ from what was originally budgeted.

How a flexible budget works

To flex a budget, we need to know that:
• Total variable costs change in direct proportion to
changes in activity.
• Total fixed costs remain unchanged within the
relevant range.

Activity Variances

An activity variance arises solely due to the difference in the actual level of activity included in the flexible budget and the level of activity included in the planning budget

Actual cost and Flecible Budget revenue

the difference is a revenue variance

actual cost and flexible budget costs

the difference between is a spending variance

Activity Variances – Performance Reports in Non-Profit Organizations

Non-profit organizations may receive funding from sources other than the sale of goods and services, so revenues may consist of both fixed and variable elements.

Performance Reports - Nonprofits

• Revenue = Fixed Revenue + Variable Revenue

• Variable Revenue = # of units x price per unit

Planning and Flexible Budgets with Multiple Cost Drivers

More than one cost driver may be needed to adequately explain all of the costs in an organization. The cost formulas used to prepare a flexible budget can be adjusted to recognize multiple cost drivers