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,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,10-,#,Flexible Budgets andPerformance Analysis,Chapter 10,Flexible Budgets andPerforman,Learning Objective 10-1,Prepare a flexible budget.,Learning Objective 10-1Prepare,Characteristics of Flexible Budgets,Planning budgetsare prepared fora single,plannedlevel,of activity.,Performance evaluation is difficult when actual activity differs from the planned level of activity.,Hmm!Comparingstatic planning budgets with actual costsis like comparingapples and oranges.,Characteristics of Flexible Bu,Improve performance evaluation.,May be prepared for any activity level in the relevant range.,Show costs that should have beenincurred at the actual level ofactivity,enabling“apples to apples”cost comparisons.,Help managers control costs.,Lets look at Larrys Lawn Service.,Characteristics of Flexible Budgets,Improve performance evaluation,Larrys Lawn Service provides lawn care in a planned community where all lawns are approximately the same size.At the end of May,Larry prepared his June budget based onmowing 500 lawns.Since all of the lawns are similar in size,Larry felt that the number of lawns mowed in a month wouldbe the best way to measure overall activity for his business.,Larrys Budget,Deficiencies of the Static Planning Budget,Larrys Lawn Service provides,Deficiencies of the Static Planning Budget,Larrys Planning Budget,Deficiencies of the Static Pla,Deficiencies of the Static Planning Budget,Larrys Actual Results,Deficiencies of the Static Pla,Deficiencies of the Static Planning Budget,Larrys Actual Results Compared with the Planning Budget,Deficiencies of the Static Pla,Deficiencies of the Static Planning Budget,Larrys Actual Results Compared with the Planning Budget,F=Favorable variance,that occurs when actual costs are less than budgeted costs.,U=Unfavorable variance,that occurs when actual costs are greater than budgeted costs.,F=Favorable variance,that occurs when actual revenue is greater than budgeted revenue.,Deficiencies of the Static Pla,Deficiencies of the Static Planning Budget,Larrys Actual Results Compared with the Planning Budget,Since these variances are,unfavorable,has Larry done a poor job controlling costs?,Since these variances are,favorable,has Larry done a good job controlling costs?,Deficiencies of the Static Pla,I dont think Ican answer thequestions usinga static budget.,Actual activity is above planned activity.,So,shouldnt the variablecosts be higher if actualactivity is higher?,Deficiencies of the Static Planning Budget,I dont think Ican answer the,The relevant question is.,“How much of the cost variances are due to higher activity and how much are due to cost control?”,To answer the question,we mustthe budget to theactual level of activity,.,Deficiencies of the Static Planning Budget,The relevant question is.,How a Flexible Budget Works,To a budget,we need to know that:,Total variable,costs,change,in direct proportion to changes in activity.,Total fixed,costs remain,unchanged,within therelevant range.,Fixed,Variable,How a Flexible Budget Works,Lets prepare a budgetfor Larrys Lawn Service.,How a Flexible Budget Works,Lets prepare a,Preparing a Flexible Budget,Larrys Flexible Budget,Preparing a Flexible BudgetLar,Quick Check,What should the total wages and salaries cost be in a flexible budget for 600 lawns?,a.$18,000.,b.$20,000.,c.$23,000.,d.$25,000.,Quick Check What should the,Learning Objective 10-2,Prepare a report showing activity variances.,Learning Objective 10-2Prepare,Activity Variances,Planning,budget revenues and expenses,Flexible,budget revenuesand expenses,The differences between the budget amounts are called activity variances.,Activity VariancesPlanningFlex,Lets use budgeting,concepts to compute activity variances for Larrys Lawn Service.,Activity Variances,Lets use budgeti,Activity Variances,Larrys Flexible Budget Compared with the Planning Budget,Activity VariancesLarrys Flex,Larrys Flexible Budget Compared with the Planning Budget,Activity Variances,Activity and revenue increase by 10 percent,but net operating income increases by more than 10 percent due to the presence of fixed costs.,Larrys Flexible Budget Compar,Learning Objective 10-3,Prepare a report showing revenue and spending variances.,Learning Objective 10-3Prepare,Revenue and Spending Variances,Flexible budget revenue,Actual revenue,The difference is a revenue variance.,Flexible budget cost,Actual cost,The difference is a spending variance.,Revenue and Spending Variances,Revenue and Spending Variances,Lets use budgeting,concepts to compute revenue and spending variances for Larrys Lawn Service.,Revenue and Spending Variances,Revenue and Spending Variances,Larrys Flexible Budget Compared with the Actual Results,$1,750 favorablerevenue variance,Revenue and Spending Variances,Larrys Flexible Budget Compared with the Actual Results,Revenue and Spending Variances,Spending variances,Larrys Flexible Budget Compar,Learning Obj
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