Kế toán, kiểm toán - Chapter 10: Flexible budgets and performance analysis

Flexible Budgets andPerformance AnalysisChapter 10Learning Objective 1Prepare a flexible budget.Characteristics of Flexible Budgets Planning budgetsare prepared fora single, plannedlevel of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity.Hmm! Comparingstatic planning budgets with actual costsis like comparingapples and oranges.Improve performance evaluation.May be prepared for any activity level in the relevant range.Show costs that should have beenincurred at the actual level ofactivity, enabling “apples to apples”cost comparisons.Help managers control costs.Let’s look at Larry’s Lawn Service.Characteristics of Flexible BudgetsLarry’s Lawn Service provides lawn care in a planned community where all lawns are approximately the same size.At the end of May, Larry prepared his June budget based onmowing 500 lawns. Since all of the lawns are similar in size,Larry felt that the number of lawns mowed in a month wouldbe the best way to measure overall activity for his business. Larry’s Budget Deficiencies of the Static Planning BudgetDeficiencies of the Static Planning BudgetLarry’s Planning BudgetDeficiencies of the Static Planning BudgetLarry’s Actual ResultsDeficiencies of the Static Planning BudgetLarry’s Actual Results Compared with the Planning BudgetDeficiencies of the Static Planning BudgetLarry’s Actual Results Compared with the Planning BudgetF = Favorable variance that occurs when actual costs are less than budgeted costs.U = Unfavorable variance that occurs when actual costs are greater than budgeted costs.F = Favorable variance that occurs when actual revenue is greater than budgeted revenue.Deficiencies of the Static Planning BudgetLarry’s Actual Results Compared with the Planning BudgetSince these variances are favorable, has Larry done a good job controlling costs?Since these variances are unfavorable, has Larry done a poor job controlling costs? I don’t think Ican answer thequestions usinga static budget.Actual activity is above planned activity. So, shouldn’t the variablecosts be higher if actualactivity is higher?Deficiencies of the Static Planning BudgetThe relevant question is . . . “How much of the cost variances is due to higher activity, and how much is due to cost control?”To answer the question,we mustthe budget to theactual level of activity. Deficiencies of the Static Planning BudgetHow a Flexible Budget Works To a budget we need to know that:Total variable costs changein direct proportion to changes in activity.Total fixed costs remainunchanged within therelevant range. FixedVariableLet’s prepare a budgetfor Larry’s Lawn Service.How a Flexible Budget WorksPreparing a Flexible BudgetLarry’s Flexible BudgetQuick Check  What should the total wages and salaries cost be in a flexible budget for 600 lawns?a. $18,000b. $20,000.c. $23,000.d. $25,000.Quick Check  What should be the total wages and salaries cost in a flexible budget for 600 lawns?a. $18,000b. $20,000.c. $23,000.d. $25,000.Total wages and salaries cost = $5,000 + ($30 per lawn  600 lawns) = $5,000 + $18,000 = $23,000 What should the total wages and salaries cost be in a flexible budget for 600 lawns?a. $18,000b. $20,000.c. $23,000.d. $25,000.Learning Objective 2Prepare a report showing activity variances.Activity VariancesPlanning budget revenues and expensesFlexible budget revenuesand expensesThe differences between the budget amounts are called activity variances.Let’s use budgetingconcepts to compute activity variances for Larry’s Lawn Service. Activity VariancesActivity VariancesLarry’s Flexible Budget Compared with the Planning BudgetActivity VariancesLarry’s Flexible Budget Compared with the Planning BudgetActivity and revenue increase by 10 percent, but net operating income increases by more than 10 percent due to the presence of fixed costs.Learning Objective 3Prepare a report showing revenue and spending variances.Revenue and Spending VariancesFlexible budget revenueActual revenueThe difference is a revenue variance.Flexible budget costActual costThe difference is a spending variance.Now, let’s use budgetingconcepts to compute revenue and spending variances for Larry’s Lawn Service. Revenue and Spending VariancesRevenue and Spending VariancesLarry’s Flexible Budget Compared with the Actual Results$1,750 favorablerevenue varianceLarry’s Flexible Budget Compared with the Actual ResultsRevenue and Spending VariancesSpending variancesLearning Objective 4Prepare a performance report that combines activity variances and revenue and spending variances.Now, let’s use budgetingconcepts to combine the revenue and spending variances reports for Larry’s Lawn Service. A Performance Report Combining Activity and Revenue and Spending VariancesA Performance Report Combining Activity and Revenue and Spending VariancesA Performance Report Combining Activity and Revenue and Spending Variances50 lawns × $75 per lawn50 lawns × $30 per lawnA Performance Report Combining Activity and Revenue and Spending Variances$43,000 actual - $41,250 budgetPerformance Reports in Non-Profit OrganizationsNon-profit organizations may receive funding from sources other than the sale of goods and services, so revenues may consist of both fixed and variable elements. UniversitiesTuition and feesDonationsState fundingEndowmentsPerformance Reports in Cost CentersPerformance reports are often prepared for cost centers. These reports should be prepared using the same principles discussed so far, except for the fact that these reports will not contain revenue or net operating income variances.Learning Objective 5Prepare a flexible budget with more than one cost driver.More than one cost driver may be needed toadequately explain all ofthe costs in an organization. The cost formulas usedto prepare a flexiblebudget can be adjustedto recognize multiplecost drivers.Flexible Budgets with Multiple Cost DriversBecause of the large unfavorable wages and salaries spendingvariance, Larry decided to add an additional cost driver for wages and salaries. The variance is due primarily to the number of hours required for the additional edging and trimming. So Larry estimates the additional hours and builds those hours into both his revenue and expense budget formulas. Larry’s New Budget Flexible Budgets with Multiple Cost DriversFlexible Budgets with Multiple Cost DriversLarry’s Budget Based on More than One Cost DriverLearning Objective 6Understand common errors made in preparing performance reports based on budgets and actual results.Some Common ErrorsThe most common errors in preparing performancereports are to implicitly assume that:1. All costs are fixed or that All costs are variable. Assume all costs are fixed.Common Error 1: Assuming All Costs Are FixedFaulty Analysis Comparing Budgeted Amounts to Actual AmountsCommon Error 2: Assuming All Costs Are VariableFaulty Analysis that Assumes All budget Items Are VariableEnd of Chapter 10