Flexible Budget and Performance Analysis | Managerial Accounting | CMA Exam | CPA Exam BEC |

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These lectures cover flexible budgeting, performance analysis, static planning budget,  revenue and spending variances, production volume variance as favorable and unfavorable.

Flexible Budget and Performance Analysis

 

Directly comparing actual revenues and costs to static planning budget revenues and costs can easily lead to erroneous conclusions. Actual revenues and costs differ from budgeted revenues and costs for a variety of reasons, but one of the biggest is a change in the level of activity. One would expect actual revenues and costs to increase or decrease as the activity level increases or decreases. Flexible budgets enable managers to isolate the various causes of the differences between budgeted and actual costs.

A flexible budget is a budget that is adjusted to the actual level of activity. It is the best estimate of what revenues and costs should have been, given the actual level of activity during the period. The flexible budget can be compared to the budget from the beginning of the period or to the actual results.

When the flexible budget is compared to the budget from the beginning of the period, activity variances are the result. An activity variance shows how a revenue or cost should have changed in response to the difference between actual and budgeted activity.

When actual results are compared to the flexible budget, revenue and spending variances are the result. A favorable revenue variance indicates that revenue was larger than should have been expected, given the actual level of activity. An unfavorable revenue variance indicates that revenue was less than it should have been, given the actual level of activity. A favorable spending variance indicates that the cost was less than expected, given the actual level of activity. An unfavorable spending variance indicates that the cost was greater than it should have been, given the actual level of activity.

A flexible budget performance report combines activity variances and revenue and spending variances on one report.

Common errors in comparing actual costs to budgeted costs are to assume all costs are fixed or to assume all costs are variable. If all costs are assumed to be fixed, the variances for variable and mixed costs will be incorrect. If all costs are assumed to be variable, the variances for fixed and mixed costs will be incorrect. The variance for a cost will only be correct if the actual behavior of the cost is used to develop the flexible budget benchmark.