Chapter_9_Flexible Budget and Performance Analysis.pdf

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1. PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D.,CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2015 by McGraw-Hill Education. All rights reserved.
Flexible Budgets and
Performance Analysis
Chapter 9

2. 9-2
Variance Analysis Cycle

3. 9-3
Learning Objective 1
Prepare a flexible
budget.

4. 9-4
Characteristics of Flexible Budgets
Planning budgets
are prepared for
a single, planned
levelof activity.
Performance
evaluation is difficult
when actual activity
differs from the
planned level of
activity.
Hmm! Comparing
static planning budgets
with actual costs
is like comparing
apples and oranges.

5. 9-5
Improve performance evaluation.
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 comparisons.
Help managers control costs.
Let’s look at Larry’s Lawn Service.
Characteristics of Flexible Budgets

6. 9-6
Larry’s 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 on
mowing 500 lawns. Since all of the lawns are similar in size,
Larry felt that the number of lawns mowed in a month would
be the best way to measure overall activity for his business.
Larry’s Budget
Deficiencies of the Static Planning
Budget

7. 9-7
Deficiencies of the Static Planning
Budget
Larry’s Planning Budget

8. 9-8
Deficiencies of the Static Planning
Budget
Larry’s Actual Results

9. 9-9
Deficiencies of the Static Planning
Budget
Larry’s Actual Results Compared with the Planning Budget

10. 9-10
Deficiencies of the Static Planning
Budget
Larry’s 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.

11. 9-11
Deficiencies of the Static Planning
Budget
Larry’s Actual Results Compared with the Planning Budget
Since these variances are unfavorable, has
Larry done a poor job controlling costs?
Since these variances arefavorable, has
Larry done a good job controlling costs?

12. 9-12
I don’t think I
can answer the
questions using
a static budget.
Actual activity is above
planned activity.
So, shouldn’t the variable
costs be higher if actual
activity is higher?
Deficiencies of the Static Planning
Budget

13. 9-13
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 must
the budget to the
actual level of activity.
Deficiencies of the Static Planning
Budget

14. 9-14
How a Flexible Budget Works
To a budget, we need to know that:
▫Total variable costschange
in direct proportion to
changes in activity.
▫Total fixedcosts remain
unchangedwithin the
relevant range.
Fixed

15. 9-15
Let’s prepare a
budget
for Larry’s Lawn
Service.
How a Flexible Budget Works

16. 9-16
Preparing a Flexible Budget
Larry’s Flexible Budget

17. 9-17
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.

18. 9-18
Quick Check 
What should be the total wages and salaries
cost in a flexible budget for 600 lawns?
a. $18,000
b. $20,000.
c. $23,000.
d. $25,000.
Total wages and salaries cost
= $5,000 + ($30 per lawn600 lawns)
$5,000 + $18,000 = $23,000
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.

19. 9-19
Learning Objective 2
Prepare a report
showing activity
variances.

20. 9-20
Activity Variances
Flexible
budget revenues
and expenses
Planning
budget revenues
and expenses
The differences between
the budget amounts are
called activity variances.

21. 9-21
Let’s use budgeting
concepts to compute activity
variances for Larry’s Lawn Service.
Activity Variances

22. 9-22
Activity Variances
Larry’s Flexible Budget Compared with the Planning Budget

23. 9-23
Activity Variances
Larry’s Flexible Budget Compared with the Planning Budget
Activity and revenue increase by 10 percent, but net operating income
increases by more than 10 percent due to the presence of fixed costs.

24. 9-24
Learning Objective 3
Prepare a report
showing revenue and
spending variances.

25. 9-25
Revenue and Spending Variances
Actual revenue Flexible budget revenue
The difference is a revenue variance.
Actual cost Flexible budget cost
The difference is a spending variance.

26. 9-26
Now, let’s use budgeting
concepts to compute revenue and
spending variances for Larry’s Lawn
Service.
Revenue and Spending Variances

27. 9-27
Revenue and Spending Variances
Larry’s Flexible Budget Compared with the Actual Results
$1,750 favorable
revenue variance

28. 9-28
Larry’s Flexible Budget Compared with the Actual Results
Revenue and Spending Variances
Spending
variances

29. 9-29
Learning Objective 4
Prepare a performance
report that combines
activity variances and
revenue and spending
variances.

30. 9-30
Now, let’s use budgeting
concepts to combine the revenue and
spending variances reports for Larry’s
Lawn Service.
A Performance Report Combining Activity and
Revenue and Spending Variances

31. 9-31
A Performance Report Combining Activity and
Revenue and Spending Variances

32. 9-32
A Performance Report Combining Activity and
Revenue and Spending Variances
50 lawns ×$75 per lawn
50 lawns ×$30 per lawn

33. 9-33
$43,000 actual -$41,250 budget
A Performance Report Combining Activity and
Revenue and Spending Variances

34. 9-34
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.
Universities
Tuition and fees
DonationsState funding
Endowments

35. 9-35
Performance Reports in Cost Centers
Performance reports are often prepared
for cost centers. These reports should be
prepared using the same principles
discussed so far, except for the fact that
these reports will not contain revenue or
net operating income variances.

36. 9-36
Learning Objective 5
Prepare a flexible budget
with more than one cost
driver.

37. 9-37
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.
Flexible Budgets with Multiple Cost
Drivers

38. 9-38
Because the time required for edging and trimming is different for
different lawns, Larry decided to add an additional cost driver
(hours) for the time required for edging and trimming. So Larry
estimated the additional hours and developed a new flexible
budget that includes the second cost driver in both his revenue
and expense budget formulas.
Larry’s New Budget
Flexible Budgets with Multiple Cost
Drivers

39. 9-39
Flexible Budgets with Multiple Cost
Drivers
Larry’s Budget Based on More than One Cost Driver

40. 9-40
Learning Objective 6
Understand common
errors made in preparing
performance reports
based on budgets and
actual results.

41. 9-41
Some Common Errors
The most common errors when preparing performance
reports are to implicitly assume that:
1. All costs are fixed, or that;
2.All costs are variable.
Assume all costs are fixed.

42. 9-42
Common Error 1: Assuming All Costs
Are Fixed
Faulty Analysis Comparing Budgeted Amounts to Actual Amounts

43. 9-43
Common Error 2: Assuming All Costs
Are Variable
Faulty Analysis that Assumes All Budget Items Are Variable

44. 9-44
End of Chapter 9