Chapter 9: Flexible Budgets & Performance Analysis | Managerial Accounting | Spring 2026

v. Variance

Differences between planned results and actual results

v. Variance Analysis Cycle

A cycle of tine used to evaluate and improve performance.

What does the Variance Analysis Cycle include?

1. Preparing a performance report

2. Analyzing its variances

3. Identifying the causes

4. Taking action to repeat / avoid variances next period

5. Preparing a performance report

v. Management by Exception

A management system that compares actual results to a planned budget to flag and investigate significant deviations.

v. Planning Budget

A budget prepared before the period begins with an estimate of every revenue and expense and units sold.

v. Flexible Budget

A budget showing what revenues and costs should have been with a given level of activity.

What type of budget should be used to gauge expected vs real activity?

Flexible budget

What is a planning budget’s biggest deficiency?

It does not account for differences in the level of activity.

How is a flexible budget different from a planning budget?

It changes activity-based variables based on different levels of activity

What are the two types of variances in flexible budgets?

Activity Variances and Revenue + Spending Variances

v. Activity Variance

Differences between revenues/expenses in the flexible budget vs the planning budget caused solely by differences in the level of activity.

v. Revenue Variance

The difference between a flexible budget’s revenue and actual recorded revenue.

v. Spending variance

The difference between a flexible budget’s spending and actual spending.

How is a planning budget structured?

How is a flexible budget structured?

How is a flexible budget performance report structured?

What is considered “favorable” in expenses?

When expenses are LESS than planned

What is considered “favorable” in revenue?

When revenue is MORE than planned

What document would you create to answer the following:
“What impact did the change in activity have on revenues, cost and profit?”

A flexible budget performance report, focusing on the activity variances

What document would you create to answer the following:
“How well did we control our revenues, costs and profit?”

A flexible budget performance report, focusing on the revenue and spending variances