Flexible Budgets and Performance Analysis

Planning Budget: Prepared for a single, planned level of activity. Used for initial planning.
Flexible Budget: Can be prepared for any activity level within the relevant range. Shows costs that should have been incurred at the actual level of activity, allowing for an "apples to apples" comparison. Helps managers control costs and improves performance evaluation.

The variance analysis cycle involves:
- Preparing a planning budget.
- Preparing a flexible budget.
- Analyzing the differences between planned and actual results.
- Using these analyses to understand and improve performance.

Larry's Lawn Service initially prepared a June budget based on mowing 500 lawns.
A comparison of the static (planned) budget to actual results reveals deficiencies because the actual level of activity differed from the planned level.
A favorable revenue variance occurs when actual revenue is greater than budgeted revenue.
An unfavorable variance happens when actual costs exceed budgeted costs.
A favorable spending variance arises when actual costs are less than budgeted costs.
Issue: A static budget is difficult to evaluate when the actual activity level differs from the planned level. It's hard to determine if variances are due to good/bad management or simply due to volume differences.

The crucial question: "How much of the cost variances are due to higher activity and how much are due to cost control?"
To answer this, we need to flex the planning budget to accommodate the actual level of activity.

To flex a budget, understand the behavior of costs:
- Total variable costs change in direct proportion to changes in activity.
- Total fixed costs remain unchanged within the relevant range.

Example: If Larry charges $75$ per lawn and mows 550 lawns, the flexible budget revenue would be 75 × 550 = $41,250. This demonstrates adjusting revenue based on actual activity.

Learning Objectives:
- Identify and calculate the activity variance.
- Identify and calculate the revenue variance.
- Identify and calculate spending variances.
A performance report combines activity, revenue, and spending variances to provide a comprehensive view of performance.
Variance Calculation: For example, if actual revenue is $43,000$ and the flexible budget revenue is $41,250$ , the favorable revenue variance is 43,000 - 41,250 = $1,750.

Petrus Framing's cost formula for supplies: $2,300$ per month plus $6$ per frame.
Planned activity: 861 frames; Actual activity: 856 frames; Actual supplies cost: $7,790$ .
To calculate the activity variance, first determine the flexible budget amount: 2,300 + ($6 "." 856) = $7,436.
The activity variance would then relate to the difference between the planned cost at 861 frames and the flexible budget at 856 frames.

Activity Variances: These arise from differences between the flexible budget and the static budget.
Revenue Variance: The difference between actual total sales revenue and what the total sales revenue should have been, given the actual level of activity.
Spending Variance: The difference between the actual cost and the flexible budget amount for that cost.

Planned output: 300 units; Actual output: 325 units; Revenue per unit: $80$ .
Revenue Variance: (Actual Units - Planned Units) * Revenue per unit = (325 - 300) "." $80 = $2,000 (Favorable).

Cost formula: $2,850$ per month plus $317$ per snow-day.
Planned: 16 snow-days; Actual: 14 snow-days; Actual cost: $7,640$ .
Flexible budget cost: 2,850 + ($317 "." 14) = $7,288.
Spending Variance: Actual Cost - Flexible Budget Cost = 7,640 - $7,288 = $352 (Unfavorable).

Multiple cost drivers may be needed to accurately explain costs.
Cost formulas in flexible budgets can be adjusted to incorporate multiple cost drivers.
Larry's Lawn Service Example: Adds