Flexible Budgets and Performance Analysis Chapter 10 McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc All rights reserved Characteristics of Flexible Budgets 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 Improve performance evaluation Let’s look at Larry’s Lawn Service 10-2 Deficiencies of the Static Planning Budget Larry’s Larry’s Lawn Lawn Service Service provides provides lawn lawn care care in in aa planned planned community community where where all all lawns lawns are are approximately approximately the the same same size size At At the the end end of of May, May, Larry Larry prepared prepared his his June June budget budget based based on on mowing mowing 500 500 lawns lawns Since Since all all of of the the lawns lawns are are similar similar in in size, size, Larry Larry felt felt that that the the number number of of lawns lawns mowed mowed in in aa month month would would be be the the best best way way to to measure measure overall overall activity activity for for his his business business Larry’s Budget 10-3 Deficiencies of the Static Planning Budget Larry’s Planning Budget 10-4 Deficiencies of the Static Planning Budget Larry’s Actual Results 10-5 Deficiencies of the Static Planning Budget Larry’s Actual Results Compared with the Planning Budget 10-6 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 are favorable, has Larry done a good job controlling costs? 10-7 Deficiencies of the Static Planning Budget The The relevant relevant question question is is “How “How much much of of the the cost cost variances variances is is due due to to higher higher activity, activity, and and how how much much is is due due to to cost cost control?” control?” To To answer answer the the question, question, we we must must the the budget budget to to the the actual actual level level of of activity activity 10-8 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 the relevant range r Va le b ia Fixed 10-9 Preparing a Flexible Budget Larry’s Flexible Budget 10-10 Activity Variances Planning budget revenues and expenses Flexible budget revenues and expenses The differences between the budget amounts are called activity variances 10-11 Activity Variances Larry’s Flexible Budget Compared with the Planning Budget 10-12 End of Chapter 10 10-22