Download Managerial Accounting Chapter 42

ACG 4361
Flexible & Static
Budgets
Prepared by
Diane Tanner
University of North Florida
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Static and Flexible Budgets
Not adjusted for
actual level of
production
Budget that can be
adjusted to various
activity levels
Which is best for use in performance analysis?
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3
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Static Budget
• A budget that projects a single level of expected
activity
• Created prior to the start of the budgeting period
• A key planning tool, but difficult to compare actual
costs at a different activity level to a static budget
• Why? Total variable costs change at different
levels of activity, while amounts on a static
budget pertain to one level of activity
The Master Budget is a static budget.
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Flexible Budgets
 A budget that is adjusted for changes in activity
such as sales volume
 Recognizes the fact that total variable costs change
based on the level of activity
 Prepared at the end of an accounting period
when the actual activity is known
 Can be applied to any cost center or profit center
budget
 Sometimes known as a dynamic budget
 Allows for preparation of more detailed variances
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Using Budgets for Performance
Evaluation
 Use a flexible budget to evaluate performance
of managers
 When comparing actual activity to budgeted
activity, both activity levels will be the same.
 Eliminates the problem of comparing actual costs
at one activity level to budgeted costs for a
different level
 Provide for a greater degree of management
control
 Eliminates sales volume as a source of
variance
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Variances
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 Performed at different degrees of detail
 Four levels ranging from level 0 through level 4
Level 0
Less detailed
Level 1
Level 2
Level 3
Level 4
More detailed
 Utilize static and flexible budgets
 Designation of variances is based on the effect on
operating income
 Favorable variances (F)
 Increase operating income
 Unfavorable variances (U)
 Decrease operating income
Preparing a Static Budget
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Golo produces and sells bins. In May, fixed costs were
budgeted at $1.20 per unit, with actual fixed costs incurred at
$521. May budget and actual information follows. Prepare a
static budget for May.
Sales in Units
Unit Selling Price
Unit Variable Cost
Budgeted
400
$5.20
$1.60
Actual
410
$5.15
$1.50
Use budgeted activity (400) and budgeted costs/ prices.
Sales revenue (400 × $5.20)
Variable costs (400 × $1.60)
Contribution margin
Fixed costs (400 × $1.20)
Operating income
$2,080
640
1,440
480
$ 960
Preparing a Flexible Budget
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Golo produces and sells bins. In May, fixed costs were
budgeted at $1.20 per unit, with actual fixed costs incurred at
$521. May budget and actual information follows. Prepare a
static budget for May.
Sales in Units
Unit Selling Price Unit Variable Cost
Budgeted
400
$5.20
$1.60
Actual
410
$5.15
$1.50
Use actual activity (units) and budgeted costs/prices.
Sales revenue (410 × $5.20)
Variable costs (410 × $1.60)
Contribution margin
Fixed costs (400 × $1.20)
Operating income
$2,132
656
1,476
480
$ 996
Same total cost at ALL levels of activity
The End