FLEXIBLE BUDGETS AND VARIANCE ANALYSIS CHAPTER 7 11/27/2018

FLEXIBLE BUDGETS A FLEXIBLE BUDGET IS SIMPLY A SERIES OF BUDGET AT DIFFERENT LEVELS OF ACTIVITY CONTRASTED WITH A “STATIC” BUDGET WHICH IS A BUDGET AT ONE LEVEL OF ACTIVITY 11/27/2018

EXAMPLE SALES PRICE IS $45 PER UNIT VARIABLE PRODUCTION COSTS ARE $20 PER UNIT VARIABLE SELLING AND ADMINISTRATIVE COSTS ARE $11 PER UNIT FIXED PRODUCTION COSTS ARE $25,000 FIXED SELLING AND ADMINISTRATIVE COSTS ARE $15,000 EXPECTED SALES ARE 4,000 UNITS 11/27/2018

STATIC BUDGET SALES $180,000 VARIABLE PRODUCTION COSTS - 80,000 FIXED PRODUCTION COSTS - 25,000 GROSS PROFIT 75,000 VARIABLE S&A COSTS - 44,000 FIXED S&A COSTS - 15,000 NET PROFIT $ 16,000 11/27/2018

FLEXIBLE BUDGET VOLUME SALES VAR. PROD. FIX. PROD. GROSS PR. VAR. S&A FIX. S&A PROFIT 2,000 3,000 4,000 5,000 6,000 90,000 135,000 180,000 225,000 270,000 40,000 60,000 80,000 100,000 120,000 25,000 25,000 50,000 75,000 100,000 125,000 22,000 33,000 44,000 55,000 66,000 15,000 -12,000 2,000 16,000 30,000 44,000 11/27/2018

THE FORMAT CAN BE CHANGED TO A CONTRIBUTION FORMAT FLEXIBLE BUDGET VOLUME SALES VAR. PROD. VAR. S&A CONTRI. FIX. PROD FIX. S&A PROFIT 2,000 3,000 4,000 5,000 6,000 90,000 135,000 180,000 225,000 270,000 40,000 60,000 80,000 100,000 120,000 22,000 33,000 44,000 55,000 66,000 28,000 42,000 56,000 70,000 84,000 25,000 15,000 -12,000 2,000 16,000 30,000 44,000 11/27/2018

Introduction This is a presentation on analyzing variances from budget Hopefully, you will learn some techniques and how they can be further examined 11/27/2018

WHAT WE WILL DO We will analyze budget variances Then we will discuss ways to “explain” these variances We will analyze sales variances, but What we do with sales variances can be done with cost variances or with operating profit variances An undesirable aspect of operating profit variances is that important information may be overlooked. E.g., a favorable sales variance could offset an unfavorable cost variance. 11/27/2018

DEFINITION Variances – Differences from expected 11/27/2018

STATIC BUDGET VARIANCE BEGINNING We begin with the The difference between the budgeted amount and the actual amount STATIC BUDGET VARIANCE 11/27/2018

EXAMPLE CASE INFORMATION You have a hotel and restaurant. Budget for Year X was: Hotel 20,000 rooms rented at $64 per night = $1,280,000 Restaurant 25,000 tables served at $16 per table = $400,000 11/27/2018

STATIC BUDGET VARIANCE Budgeted Actual Sales Sales Variance Lodging $1,280,000 $1,231,200 Restaurant 400,000 375,100 Total 1,680,000 1,606,300 $48,800 U 24,900 U STATIC BUDGET VARIANCE $73,700 U 11/27/2018

EXERCISE Budget: 15,000 single rooms at $40 = 600,000 10,000 double rooms at $55 = 550,000 Actual: 14,100 single rooms at $41 = 578,100 11,000 double rooms at $56 = 616,000 11/27/2018

EXERCISE: CALCULATE THE STATIC BUDGET VARIANCE Budgeted Actual Sales Sales Variance Single 600,000 578,100 21,900 U Double 550,000 616,000 66,000 F Total 1,150,000 1,194,100 STATIC BUDGET VARIANCE $44,100 U 11/27/2018

FURTHER ANALYSIS We can then separate the static budget variance into the FLEXIBLE BUDGET VARIANCE and the SALES VOLUME VARIANCE 11/27/2018

STATIC BUDGET VARIANCE VARIANCE OVERVIEW STATIC BUDGET VARIANCE FLEXIBLE BUDGET VARIANCE SALES VOLUME VARIANCE 11/27/2018

EXAMPLE : FLEXIBLE BUDGET VARIANCE Actual Volume times difference in actual price and budget price Lodging 19,000 ($64.8 - $64) = $15,200 F Restaurant 24,200 ($15.5 - $16) = 12,100 U FLEXIBLE BUDGET VARIANCE $3,100 F 11/27/2018

STATIC BUDGET VARIANCE VARIANCE OVERVIEW STATIC BUDGET VARIANCE $73,700 U FLEXIBLE BUDGET VARIANCE $3,100 F 11/27/2018

EXERCISE: CALCULATE THE FLEXIBLE BUDGET VARIANCE Single 14,100 ($41 - $40) = $14,100 F Double 11,000 ($56 - $55) = 11,000 F FLEXIBLE BUDGET VARIANCE = $25,100 F 11/27/2018

STATIC BUDGET VARIANCE VARIANCE OVERVIEW STATIC BUDGET VARIANCE $44,100 U FLEXIBLE BUDGET VARIANCE $25,100 F 11/27/2018

EXAMPLE: SALES VOLUME VARIANCE Difference between budget and actual sales times budgeted price Lodging (20,000-19,000) 64 = $ 64,000 U Restaurant (25,000-24,200) 16 = 12,800 U SALES VOLUME VARIANCE $76,800 U 11/27/2018

STATIC BUDGET VARIANCE VARIANCE OVERVIEW STATIC BUDGET VARIANCE $73,700 U FLEXIBLE BUDGET VARIANCE $3,100 F SALES VOLUME VARIANCE $76,800 U 11/27/2018

Flexible budget variance $ 3,100 F Sales volume variance 76,800 U EXAMPLE The Flexible Budget Variance and the Sales Volume Variances combined equal the Static Budget Variance Flexible budget variance $ 3,100 F Sales volume variance 76,800 U Static budget variance $ 73,700 U 11/27/2018

EXERCISE: CALCULATE THE SALES VOLUME VARIANCE Single (15,000 - 14,100) 40 = $ 36,000 U Double (10,000 - 11,000) 55 = 55,000 F SALES VOLUME VARIANCE = $19,000 F 11/27/2018

STATIC BUDGET VARIANCE VARIANCE OVERVIEW STATIC BUDGET VARIANCE $44,100 F FLEXIBLE BUDGET VARIANCE $25,100 F SALES VOLUME VARIANCE $19,000 F 11/27/2018

EXERCISE: ADD THE FLEXIBLE BUDGET VARIANCE AND THE SALES VOLUME VARIANCE Flexible Budget Variance $ 25,100 F The Sales Volume Variance 19,000 F Static Budget Variance $ 44,100 F Now, let’s further analyze the Sales Volume Variance 11/27/2018