1. Lecture 5 Flexible Budgeting

2. Budgets are based on some measure of output; such as units sold or produced. The static budget is based on the original, projected level of activity. The flexible budget adjusts budgeted costs for the actual level of activity.

3. Flexible Budgeting Building a flexible budget involves the following steps: Obtain the flexible budget for fixed costs directly from the static budget. Use the static budget to calculate the variable cost per unit of activity. Multiply the variable cost per unit by the actual number of units

4. Flexible Budgeting Pro forma statements, for hypothetical levels of output, also use the same “flexible budgeting” technique.

5. Flexible Budgeting New Skeet Orphanage

6. The Convent at New Skeet runs an orphanage. Sister Sarah manages the orphanage and Sister Rachel is responsible for the accounting records. Sister Rachel prepared the following summary of actual and budgeted costs for 2001.

7. BudgetActual Number of children (all ages)8072 Fixed costs: Utilities $ 25,000$ 27,250 Janitorial Services $ 14,000$ 15,500 Repairs and Maintenance $ 17,500$ 14,300 Salaries for non-Convent employees $ 85,000$ 92,000 Total fixed costs$141,500$149,050 Variable costs: Food $438,000$409,968 Clothing $ 40,000$ 39,600 Laundry & Linen Service $ 14,000$ 13,040 Educational Costs $ 26,000$ 25,480 Allowances $ 20,000$ 25,000 Total variable costs$538,000$513,088 Total costs$679,500$662,138

8. Sister Sarah is very concerned that the orphanage uses its funds efficiently. She is pleased that total costs were below budget for the year, but she wonders if this is partly due to the fact that the orphanage housed fewer children than expected for the year. Required: 1.Prepare a flexible budget for 2001, based (i.e., “flexed”) on the number of children actually housed in 2001. 2.Should Sister Sarah be satisfied with the orphanage’s cost management in 2001? Briefly explain.

9. Preparation of Flexible Budget:StaticFlexibleBudget Number of children (all ages)8072 Fixed costs: Utilities $ 25,000$ 25,000 Janitorial Services $ 14,000$ 14,000 Repairs and Maintenance $ 17,500$ 17,500 Salaries for non-Convent employees $ 85,000$ 85,000 Total fixed costs$141,500$141,500 Variable costs: Food $438,000$394,200 Clothing $ 40,000$ 36,000 Laundry & Linen Service $ 14,000$ 12,600 Educational Costs $ 26,000$ 23,400 Allowances $ 20,000$ 18,000 Total variable costs$538,000$484,200 Total costs$679,500$625,700

10. Comparison of Flexible Budget Flexible to Actual ResultsBudgetActual Number of children (all ages)7272 Fixed costs: Utilities $ 25,000$ 27,250 Janitorial Services $ 14,000$ 15,500 Repairs and Maintenance $ 17,500$ 14,300 Salaries for non-Convent employees $ 85,000$ 92,000 Total fixed costs$141,500$149,050 Variable costs: Food $394,200$409,968 Clothing $ 36,000$ 39,600 Laundry & Linen Service $ 12,600$ 13,040 Educational Costs $ 23,400$ 25,480 Allowances $ 18,000$ 25,000 Total variable costs$484,200$513,088 Total costs$625,700$662,138

11. The Spring Valley Bicycle Company planned to produce and sell 6,000 units of its sole product in 2007. The product is a mountain bike. The company planned to earn revenues during the year of $5,160,000. The budget calls for direct materials of $250 per bike, and direct labor of $114 per bike. Total fixed manufacturing overhead was budgeted at $1,100,000. Total variable overhead was budgeted at $402,000. The company budgeted a sales commission of $70 per unit. In addition to the sales commission, which is a variable cost, there are fixed S.G. & A. expenditures budgeted at $85 per unit when 6,000 units are produced and sold. Required: Complete the following table. Be sure to indicate if variances are favorable or unfavorable.

12. The Spring Valley Bicycle Company planned to produce and sell 6,000 units of its sole product in 2007. The company planned to earn revenues during the year of $5,160,000. The budget calls for direct materials of $250 and direct labor of $114 per bike. Fixed mfg overhead was budgeted at $1,100,000. Total variable overhead was budgeted at $402,000. The company budgeted a sales commission of $70 per unit. In addition, there are fixed S.G. & A. expenditures budgeted at $85 per unit when 6,000 units are produced and sold. Static budget Static budget variance Actual results Flexible budget variance Flexible budget Units made Units sold Revenue COGS Gross Margin Fixed SG&A Sales comm. Income 8,000 7,000 $6,181K 4,238K 1,943K 485K 525K $ 933K

13. The Spring Valley Bicycle Company planned to produce and sell 6,000 units of its sole product in 2007. The company planned to earn revenues during the year of $5,160,000. The budget calls for direct materials of $250 and direct labor of $114 per bike. Fixed mfg overhead was budgeted at $1,100,000. Total variable overhead was budgeted at $402,000. The company budgeted a sales commission of $70 per unit. In addition, there are fixed S.G. & A. expenditures budgeted at $85 per unit when 6,000 units are produced and sold. Static budget Static budget variance Actual results Flexible budget variance Flexible budget Units made Units sold Revenue COGS Gross Margin Fixed SG&A Sales comm. Income 6,000 $5,160K 3,686K 1,474K 510K 420K $544K 1,021K F 552K U 469K F 25K F 105K U 389K F 8,000 7,000 $6,181K 4,238K 1,943K 485K 525K $ 933K 161K F 258.5K U 97.5K U 25K F 35K U 107.5K U 8,000 7,000 $6,020 3,979.5K 2,040.5K 510K 490K $1,040.5