Flexible & Static Budgets ACG 4361 Flexible & Static Budgets Prepared by Diane Tanner University of North Florida 5-1

Static and Flexible Budgets 2 Static Budget Flexible Budget Not adjusted for actual level of production Budget that can be adjusted to various activity levels Which is best for use in performance analysis? 2

3 Static Budget 3 A budget that projects a single level of expected activity Created prior to the start of the budgeting period A key planning tool, but difficult to compare actual costs at a different activity level to a static budget Why? Total variable costs change at different levels of activity, while amounts on a static budget pertain to one level of activity The Master Budget is a static budget.

4 Flexible Budgets 4 A budget that is adjusted for changes in activity such as sales volume Recognizes the fact that total variable costs change based on the level of activity Prepared at the end of an accounting period when the actual activity is known Can be applied to any cost center or profit center budget Sometimes known as a dynamic budget Allows for preparation of more detailed variances

Using Budgets for Performance Evaluation 5 5 Using Budgets for Performance Evaluation Use a flexible budget to evaluate performance of managers When comparing actual activity to budgeted activity, both activity levels will be the same. Eliminates the problem of comparing actual costs at one activity level to budgeted costs for a different level Provide for a greater degree of management control Eliminates sales volume as a source of variance

Variances Performed at different degrees of detail 6 6 Variances Performed at different degrees of detail Four levels ranging from level 0 through level 4 Level 0 Level 1 Level 2 Level 3 Level 4 Less detailed More detailed Utilize static and flexible budgets Designation of variances is based on the effect on operating income Favorable variances (F) Increase operating income Unfavorable variances (U) Decrease operating income

Preparing a Static Budget 7 7 Golo produces and sells bins. In May, fixed costs were budgeted at $1.20 per unit, with actual fixed costs incurred at $521. May budget and actual information follows. Prepare a static budget for May. Sales in Units Unit Selling Price Unit Variable Cost Budgeted 400 $5.20 $1.60 Actual 410 $5.15 $1.50 Use budgeted activity (400) and budgeted costs/ prices. Sales revenue (400 × $5.20) $2,080 Variable costs (400 × $1.60) 640 Contribution margin 1,440 Fixed costs (400 × $1.20) 480 Operating income $ 960

Preparing a Flexible Budget 8 8 Golo produces and sells bins. In May, fixed costs were budgeted at $1.20 per unit, with actual fixed costs incurred at $521. May budget and actual information follows. Prepare a static budget for May. Sales in Units Unit Selling Price Unit Variable Cost Budgeted 400 $5.20 $1.60 Actual 410 $5.15 $1.50 Use actual activity (units) and budgeted costs/prices. Sales revenue (410 × $5.20) $2,132 Variable costs (410 × $1.60) 656 Contribution margin 1,476 Fixed costs (400 × $1.20) 480 Operating income $ 996 Same total cost at ALL levels of activity

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