Prepared by Diane Tanner University of North Florida Flexible Vs. Static Budgets Chapter 7

2 Static and Flexible Budgets 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  The initial budget prepared at the estimated level of activity, before the period begins  Prepared for a single level of activity  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 are for one level of activity 3

4 Flexible Budgets  A budget that is adjusted for changes in activity such as sales volume  Can be applied to any cost center or profit center budget  Costs are often divided into variable and fixed components  Variable portion  Determined by multiplying the budgeted variable cost per unit times the actual number of units produced and sold  Fixed portion  Represents the budgeted fixed costs and remains constant at every activity level 4

5 Using Budgets for Performance Evaluation  When comparing actual activity to budgeted activity, both activity levels must be the same.  Static budget  Prepared for a single level of activity  The initial estimated budget level  Flexible budget  Prepared for the level of activity actually achieved at the end of the accounting period  Eliminates the problem of comparing actual costs at one activity level to budgeted costs for a different level 5

The End