Performance Measurement

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Performance Measurement
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Remember a budgeting has three perspectives

• Planning Function
• Set up short-term goal develop budget
• Performance Measurement
• Controlling Function

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Comparing Actual Results to Planned Results

• Budget Comparison and Variance Analysis

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Two sides of coin

• We can just plan
• But if we have a plan we can use it to control
  operations
• A plan that isnt used to evaluate performance is
  a wasted effort

Planning
Control
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Performance Measurement Comparing to Budget

• The starting point for control performance
  measurement is to compare actual outcomes to the
  plan
• There could be various types of comparisons
• Master budget
• Flexible budget
• Standard budget

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Budget Target

• On a regular basis, actual performance should be
  compared to the budget
• Identify problems so that they can be resolved
  quickly
• Sometimes the budget assumptions were wrong and
  the budget rather than performance might be the
  problem
• REVISE BUDGET!

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Flexibility is necessary

• Most budgets are out-of-date within the first
  month as unforeseen events occur
• This might be one reason to consider rolling
  budgets an ongoing revision process
• Always having 12 months of budgets ahead of you
  instead of a once a year process
• Rolling forecasts is another name for the same
  thing

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Static vs. Flexible Budget

• Budget comparisons and variances

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Static (Master) Budget

• It is called Master Budget
• Budgeted revenues and budgeted costs based on the
  level of output planned at the start of the
  budget period.
• Actual Performance is compared to Static Budget

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Example of Static Budget Comparison Report

• Budget assumptions
• 20 per unit sales price
• 10 per unit variable costs
• Anticipated sales 1,000 units per month
• Fixed costs 3,000 per month
• Actual sales were 1,200 units at 18 each and the
  variable costs were 9.5 each? Actual fixed cost
  3,300

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Example of Static Budget Comparison Report
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Flexible Budget

• This is the budget we would have prepared HAD WE
  ONLY KNOWN the number of units that would be sold
  or produced.
• Remember that budget needs information about
• Sales price
• Sales volume
• Product costs

Flexible budget assumes that the actual sales
volume is given.
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Flexible Budget

• Given the number of products to be sold
  (produced), F/B needs to know assumptions of
• Expected selling price per unit
• Variable cost per unit
• Fixed costs (in total)

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Example of Flexible Budget

• Budget assumptions
• 20 per unit sales price
• 10 per unit variable costs
• Anticipated sales 1,000 units per month
• Fixed costs 3,000 per month
• Actual sales were 1,200 units at 18 each and the
  variable costs were 9.5 each? Actual fixed cost
  3,300

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Flexible Budget Example
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Compared to original budget

• Note that if we did our budget comparison based
  on the original sales level (Master budget), the
  department looks good when it really wasnt on
  target

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We can further analyze the variances

• Sales VOLUME variance
• Variance caused by selling more or less than
  planned
• Formula (actual units planned units)
  planned selling price per unit
• Another definition Difference between master
  budget and flexible budget

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We can further analyze the variances

• Sales PRICE variance
• Variance caused when sales price per unit is
  different than we planned
• Formula(actual unit price budgeted unit
  price) units sold
• Alternate definition Difference between flexible
  budget and actual

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Sales revenue variances
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Our example
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Easier than formulas?

• Sales volume variance
• (actual units planned units) planned selling
  price per unit
• Sales price variance
• (actual unit price budgeted unit price) units
  sold

Note Some companies use contribution margin per
unit instead of selling price to compute these
variances.
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Exercise Problem
FX produces luxury check books. Following is
information of operating budget and actual
results.
Q1. Calculate variances in sales, variable and
fixed costs under master budget. Q2. Calculate Q1
under flexible budget. (Do quantity, price
variance analysis).