Chapter 10 Key topics: –Budget objectives and cycle –Static versus flexible budgets –Budget variances –Developing and using flexible budgets –Other types of budgets Chapter 10 Static and Flexible Budgets

Chapter 10 Budget Objectives

Chapter 10 Budget Cycle

Chapter 10 Operating Budget

Chapter 10 Financial Budget

Chapter 10 Master Budget - Production, Direct Materials, and Labor Hours Budgets

Chapter 10 Static Versus Flexible Budgets for Performance Evaluation Managers should be held responsible for those things they control. Static budget: Based on expected costs at a specific volume of products Flexible budget: Reflects a range of operations

Chapter 10 Variances Budget Variances Differences between budgeted and actual results May be favorable or unfavorable Major Reasons for Variances Actual activities do not follow plans Budget may be an inappropriate benchmark Static Budget Variances Variances based on the budget for a specific volume of production or services Variable cost variances are misleading Useful for measuring performance of individuals/departments responsible for achieving budgeted volume of activity Flexible Budget Variances Variances based on the budget adjusted for actual sales or production volume Variable costs are adjusted for actual volume of activity Useful for measuring performance of individuals/departments that are not responsible for achieving budgeted volume of activity

Chapter 10 Budget Adjustments for Performance Evaluation Use Flexible Budget to Adjust for Actual Volumes Remove Uncontrollable and Allocated Costs Update Costs for Anticipated Price Changes

Chapter 10 Developing a Flexible Budget for Performance Evaluation

Chapter 10 Visiting Nurse Program Evaluation

Chapter 10 Budgets, Incentives, and Reward Participative Budgeting –Bottom up budgeting - managers have more information –Motivates employees to buy into budget goals –May result in budgetary slack

Chapter 10 Other Types of Budgets Long-term budgets Rolling budgets Activity-based budgets Kaizen budgets Extreme programming

Chapter 10 All values are estimates Cannot predict changes in customer preferences, competitors actions, economy Although values are uncertain, plans and benchmarks are necessary for most organizations Uncertainties in Budgets