Flexible Budgeting

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Chapter Eleven

• Flexible Budgeting

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Flexible Budgets
Comparingstatic budgetswith actual costsis
like comparingapples and oranges.

• Static budgets assume a single planned level
  of activity.
• Actual results have actual activity differing
  from planned activity
• Therefore actual variable costs will be a
  function also of activity

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Flexible Budgets

• ANSWER Prepare Budgets with more than one level
  of activity--Flexible Budgets (or analysis using
  those principles)
• Example Group Health Trust

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Static Budgets andPerformance Reports
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Static Budgets andPerformance Reports

• The relevant question is . . .
• How much of the favorable cost variance is due
  to lower activity how much is due to good cost
  control?
• To answer the question,we mustthe budget to
  theactual level of activity.

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Preparing a Flexible Budget

• To a budget for different activity
  levels, we must know how costs behave with
  changes in activity levels.
• Total variable costs changein direct proportion
  to changes in activity.
• Total fixed costs remainunchanged within
  therelevant range.

Variable
Fixed
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Preparing a Flexible Budget
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Flexible BudgetPerformance Report
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Advantages of Flexible Budgets
Show revenues and expensesthat should have
occurred at theactual level of activity.
May be prepared for any activity level in the
relevant range.
Reveal variances due to good cost control or lack
of cost control.
Improve performance evaluation.