1. FLEXIBLE BUDGETS AND VARIANCE ANALYSIS
CHAPTER 7
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2. 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
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3. 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
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4. STATIC BUDGET SALES $180,000 VARIABLE PRODUCTION COSTS - 80,000
FIXED PRODUCTION COSTS - 25,000
GROSS PROFIT ,000
VARIABLE S&A COSTS ,000
FIXED S&A COSTS ,000
NET PROFIT $ 16,000
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5. 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
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6. 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
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7. Introduction This is a presentation on analyzing variances from budget
Hopefully, you will learn some techniques and how they can be further examined
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8. 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.
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9. DEFINITION
Variances – Differences from expected
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10. STATIC BUDGET VARIANCE
BEGINNING
We begin with the
The difference between the budgeted amount and the actual amount
STATIC BUDGET VARIANCE
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11. 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
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12. STATIC BUDGET VARIANCE
Budgeted Actual
Sales Sales Variance
Lodging $1,280, $1,231,200
Restaurant , ,100
Total ,680, ,606,300
$48,800 U
24,900 U
STATIC BUDGET VARIANCE $73,700 U
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13. 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
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14. EXERCISE: CALCULATE THE STATIC BUDGET VARIANCE
Budgeted Actual
Sales Sales Variance
Single , , ,900 U
Double , , ,000 F
Total ,150, ,194,100
STATIC BUDGET VARIANCE $44,100 U
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15. FURTHER ANALYSIS
We can then separate the static budget variance into the
FLEXIBLE BUDGET VARIANCE and the
SALES VOLUME VARIANCE
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16. STATIC BUDGET VARIANCE
VARIANCE OVERVIEW
STATIC BUDGET VARIANCE
FLEXIBLE BUDGET
VARIANCE
SALES VOLUME
VARIANCE
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17. EXAMPLE : FLEXIBLE BUDGET VARIANCE
Actual Volume times difference in actual price and budget price
Lodging 19,000 ($ $64) = $15,200 F
Restaurant 24,200 ($ $16) = 12,100 U
FLEXIBLE BUDGET VARIANCE $3,100 F
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18. STATIC BUDGET VARIANCE
VARIANCE OVERVIEW
STATIC BUDGET VARIANCE
$73,700 U
FLEXIBLE BUDGET
VARIANCE
$3,100 F
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19. EXERCISE: CALCULATE THE FLEXIBLE BUDGET VARIANCE
Single 14,100 ($41 - $40) = $14,100 F
Double 11,000 ($56 - $55) = ,000 F
FLEXIBLE BUDGET VARIANCE = $25,100 F
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20. STATIC BUDGET VARIANCE
VARIANCE OVERVIEW
STATIC BUDGET VARIANCE
$44,100 U
FLEXIBLE BUDGET
VARIANCE
$25,100 F
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21. 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 = ,800 U
SALES VOLUME VARIANCE $76,800 U
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22. STATIC BUDGET VARIANCE
VARIANCE OVERVIEW
STATIC BUDGET VARIANCE
$73,700 U
FLEXIBLE BUDGET
VARIANCE
$3,100 F
SALES VOLUME
VARIANCE $76,800 U
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23. 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 ,800 U
Static budget variance $ 73,700 U
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24. EXERCISE: CALCULATE THE SALES VOLUME VARIANCE
Single (15, ,100) 40 = $ 36,000 U
Double (10, ,000) 55 = ,000 F
SALES VOLUME VARIANCE = $19,000 F
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25. STATIC BUDGET VARIANCE
VARIANCE OVERVIEW
STATIC BUDGET VARIANCE
$44,100 F
FLEXIBLE BUDGET
VARIANCE
$25,100 F
SALES VOLUME
VARIANCE
$19,000 F
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26. EXERCISE: ADD THE FLEXIBLE BUDGET VARIANCE AND THE SALES VOLUME VARIANCE
Flexible Budget Variance $ 25,100 F
The Sales Volume Variance ,000 F
Static Budget Variance $ 44,100 F
Now, let’s further analyze the Sales Volume Variance
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