Accounting Chapter Nine: Flexible Budgets and Performance Analysis

Chapter Nine’s Focus:

To check if actual performance such as revenue, costs, and overall financial results matches what was budgeted and decide if changes are needed to to improve operations or control costs.

How does chapter nine differ from the previous chapter?

The last ch.’s focus was on planning future budgets. Ch.9 is about using budgets to evaluate actual performance. soo planning vs evaluating.

What is a static budget? (*aka the budgets prepared in the last chapter)

A budget ( for revenue, costs, and overall financial results) for or example a single, planned activity level (like 1,000 units) doesn’t change, even if activity levels do.

Why isn’t a static budget useful for evaluating performance?

A static budget can make it look like a company is overspending or underspending when in reality, the differences are just due to changes in activity levels not poor cost control.

What is a flexible budget?

A budget that adjusts to match the actual level of activity, it gives a more accurate comparison of performance.

Why is a flexible budget better for evaluating performance?

It shows what costs and revenue ( the budget) should have been at the actual activity level, helping you see if variances are real performance issues.

What are Variances?

The differences between what was planned (budgeted) and what actually happened..

In budgeting, there are two main types:

• Revenue Variances and Spending Variances

What is the "Variance Analysis Cycle"

A process to focus on big differences between the budget and the actual results, so that managers only focus in important issues.

What does “ Management Exception” mean?

It is an approach where managers pay attention to only large or important variances, ignoring small ones.

What are the steps in the Variance Analysis Cycle?

1. Prepare performance report:

   1. Create a report comparing actual results to the budget, showing variances.

2. Analyze variances:

   1. Look at the differences (variances) to see where actual results differed from the budget.

3. Raise Questions:

   1. Identify any large or unexpected variances and ask why they occurred.

4. Identify Root Causes:

   1. Investigate further to find the reasons behind significant variances

5. Take Action:

   1. Make changes or improvements based on what was learned to address any issues.

6. Prepare for the next period:

   1. Use insights from this analysis to adjust the budget or plans for the future, improving performance over time.

Why is the variance analysis cycle important?

It helps managers focus on major issues that affect performance, rather than small, less important details.

What’s the main difference between a static and flexible budget?

A static budget is fixed, while a flexible budget adjusts based on actual activity levels.

What is an “activity variance”?

A difference caused by the actual level of activity being different from what was planned.

What are the two main types of variances in flexible budgeting?

1. Revenue Variance: The difference between actual and budgeted revenue at the actual activity level.

2. Spending Variance: The difference between actual and budgeted costs at the actual activity level.

How does a flexible budget prevent misleading evaluations?

By matching budgeted and actual figures ($) to the same activity level, it shows true performance differences.

What are spending variances?

Differences between what was actually spent and what the flexible budget expected at that activity level.

Why is it important to investigate spending variances?

To find out if the company is overspending or if costs were justified by higher activity.