1. Flexible Budgets & Performance Reports
Chapter 8
Flexible Budgets & Performance Reports
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©National Core Accounting Publications

2. Flexible Budgets
A flexible budget covers a range of activities within which the firm may operate.
As a planning tool, flexible budgets are prepared to enable a firm to quantify expected results at different activity levels.
As a control tool, flexible budgets are used to evaluate actual results by restating the original static budget figures to the actual level of activity achieved.
Budgeted monetary amounts are related to the actual level of activity attained.
Slides prepared by Peter Miller
©National Core Accounting Publications

3. Example
Data
Solution
The flexible budget relates to both revenues as well as costs. In fact, it is in the area of costs where flexible budgeting is used extensively as both a planning and control tool.
Slides prepared by Peter Miller
©National Core Accounting Publications

4. Classification of costs
Fixed
Those costs which remain constant irrespective of the level of activity attained
Variable
Those costs that vary according to changes in the level of activity
The "flex" in a flexible budget concerns the variable costs (that is, those costs that vary with changes in activity levels) whereas the budget for fixed costs is static.
Slides prepared by Peter Miller
©National Core Accounting Publications

5. Flexible Budget Formula
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6. Flexible Budgeting for Service Organisations
Service organisations are dependent upon the quantity of services that can be provided for their income and are usually labour intensive.
Example
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7. Solution Slides prepared by Peter Miller
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8. Flexible Budgeting for Trading Operations
Trading (retail or wholesale) organisations are in the business of purchasing and selling tangible items or products referred to as Inventory or Stock.
When preparing budgets for trading organisations
Forecast revenue based on the development of pricing structures to be used for pricing the organisation’s products.
Forecast the cost of goods sold (also referred to as Cost of Sales).
Forecast other variable costs.
Forecast fixed costs associated with running the business.
Slides prepared by Peter Miller
©National Core Accounting Publications

9. Flexible Budgeting Techniques applied to Trading Organisations
Example
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10. Solution Slides prepared by Peter Miller
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11. Flexible Budgeting for Manufacturing Operations
The Manufacturing Firm incurs costs for:
Direct Materials classified as a variable cost.
Direct Labour classified as a variable cost.
Factory Overhead which has both a fixed and variable component. Factory overhead is comprised of all factory costs other than direct materials and direct labour.
Variable manufacturing costs vary in proportion to units manufactured
Slides prepared by Peter Miller
©National Core Accounting Publications

12. Flexible Budgeting for Manufacturing Operations
Non Manufacturing costs
Selling Expenses which have both fixed and variable components.
Administration Expenses which are mainly fixed in nature.
Financial Expenses which relate to financing costs predominantly fixed in nature.
Variable Expenses vary in proportion to units sold.
Slides prepared by Peter Miller
©National Core Accounting Publications

13. Flexible Budgeting applied to Manufacturing Organisation
Example
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14. Flexible Budgeting applied to Manufacturing Organisation
Example (cont)
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15. Flexible Budgeting applied to Manufacturing Organisation
Solution
D.Wide Manufacturing
Income Statement – Flexible Budget Forecasts
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16. Flexible Budgeting applied to Manufacturing Organisation
Solution
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©National Core Accounting Publications

17. Performance Report Revenue Variances
Actual results achieved are compared with the Master (Static) Budget to enable the determination of variances.
Revenue Variances
Favourable Revenue Variance
If actual sales revenue is greater than budgeted sales revenue, this is a favourable variance.
Unfavourable Revenue Variance
If actual sales revenue is less than budgeted sales revenue, this is an unfavourable variance.
Slides prepared by Peter Miller
©National Core Accounting Publications

18. Performance Report Cost Variances Favourable Cost Variance
If actual costs and expenses are less than budgeted costs and expenses, this is classified as a favourable variance.
Unfavourable Cost Variance
If actual costs and expenses are greater than budgeted costs and expenses, this is classified as an unfavourable variance.
Slides prepared by Peter Miller
©National Core Accounting Publications

19. Favourable and Unfavourable Variances
F (favourable) variance
The variance increases operating profits
U (Unfavourable) Variance
Decreases operating profits
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©National Core Accounting Publications

20. Measurement and Disclosure of Variances
Variances may be measured and disclosed in two ways:
The absolute size of the variance
Percentage analysis
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©National Core Accounting Publications

21. Comparison of Actual Results with the Master (Static) Budget
RESPONSIBILITY ACCOUNTING
At the end of an accounting period actual results should be compared to the budget.
Efficiencies or inefficiencies are measured by the resultant variances ( if any ).
Efficiency of operations are shown by favourable variances.
Inefficiencies are shown by unfavourable variances.
Slides prepared by Peter Miller
©National Core Accounting Publications

22. Responsibility Centres
Units or parts of the business that a manager has control over.
Revenue Centre.
Cost Centre.
Profit Centre.
Investment Centre.
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©National Core Accounting Publications

23. Management by Exception
Management by exception is where the manager is notified only if there are variances that are significantly larger than expected.
Under this principal the manager is not notified if all is well and things are going to plan.
Variance analysis is an important investigative tool to help guide the firm to take corrective action in those areas where there are problems as indicated by the size of the variance.
Slides prepared by Peter Miller
©National Core Accounting Publications

24. Horizontal Trend Analysis
Analysis involves comparing a base year with future years and measuring the percentage change.
Example
The base year is always considered 100 percent.
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©National Core Accounting Publications

25. Flexible Budgeting applied to a Manufacturing Organisation
Example
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26. Flexible Budgeting applied to a Manufacturing Organisation
Solution
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27. Current Month and Year to date Performance Analysis
When preparing budgets and performance reports most firms prepare annual operating budgets broken down into 12 monthly periods to more accurately predict revenues and costs to take into account monthly and seasonal variations.
It is also possible to analyse the operations for the business on a cumulative basis where the year to date budgets are compared to the year to date actual variance.
Slides prepared by Peter Miller
©National Core Accounting Publications

28. Example Slides prepared by Peter Miller
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29. Visual Presentation of Data
Next
Chapter 7
Visual Presentation of Data
Slides prepared by Peter Miller
©National Core Accounting Publications