Chapter 9 flexible budgets and performance analysis
Variance Analysis Cycle
Learning Objective 1
Prepare a planning budget and a flexible budget with one cost driver.
Characteristics of Flexible Budgets: Part 1
Planning budgets are prepared for a single, planned level of activity.
Performance evaluation is difficult when actual activity differs from the planned level of activity.
Characteristics of Flexible Budgets:
Part 2
1. May be prepared for any activity level in the relevant range.
2. Show costs that should have been incurred at the actual level of activity, enabling “apples to
apples” cost comparison.
3. Help managers control costs.
4. Improve performance evaluation.
Deficiencies of the Static Planning Budget: Part 1
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.
Static or Master Budget is based on one scenario
Deficiencies of the Static Planning Budget: Part 2
Deficiencies of the Static Planning Budget: Part 3
Deficiencies of the Static Planning Budget: Part 4
Deficiencies of the Static Planning Budget: Part 7
, At this point, we cannot answer this question because the actual level of activity is greater than the
planned level of activity. Therefore, actual variable costs are likely to be higher than planned variable
costs regardless of Larry’s managerial efficiency.
Deficiencies of the Static Planning Budget: Part 8
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 need to flex the planning budget to accommodate the actual level of activity.
How a Flexible Budget Works:
Part 1
To flex a budget, we need to know that:
Total variable costs change in direct proportion to changes in activity.
Total fixed costs remain unchanged within the
relevant range.
How a Flexible Budget Works:
Part 2
Preparing a Flexible Budget
Quick Check 1
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.
Learning Objective 2
Calculate and interpret activity variances.
Activity Variances: Part 1
Variance Analysis Cycle
Learning Objective 1
Prepare a planning budget and a flexible budget with one cost driver.
Characteristics of Flexible Budgets: Part 1
Planning budgets are prepared for a single, planned level of activity.
Performance evaluation is difficult when actual activity differs from the planned level of activity.
Characteristics of Flexible Budgets:
Part 2
1. May be prepared for any activity level in the relevant range.
2. Show costs that should have been incurred at the actual level of activity, enabling “apples to
apples” cost comparison.
3. Help managers control costs.
4. Improve performance evaluation.
Deficiencies of the Static Planning Budget: Part 1
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.
Static or Master Budget is based on one scenario
Deficiencies of the Static Planning Budget: Part 2
Deficiencies of the Static Planning Budget: Part 3
Deficiencies of the Static Planning Budget: Part 4
Deficiencies of the Static Planning Budget: Part 7
, At this point, we cannot answer this question because the actual level of activity is greater than the
planned level of activity. Therefore, actual variable costs are likely to be higher than planned variable
costs regardless of Larry’s managerial efficiency.
Deficiencies of the Static Planning Budget: Part 8
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 need to flex the planning budget to accommodate the actual level of activity.
How a Flexible Budget Works:
Part 1
To flex a budget, we need to know that:
Total variable costs change in direct proportion to changes in activity.
Total fixed costs remain unchanged within the
relevant range.
How a Flexible Budget Works:
Part 2
Preparing a Flexible Budget
Quick Check 1
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.
Learning Objective 2
Calculate and interpret activity variances.
Activity Variances: Part 1
