Flexible Budget:
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The
flexible budget is more sophisticated and useful than a static budget, which remains at one
amount regardless of the volume of activity.
Flexible Budgets means what? Basically, flexible budgets means compromising or melodious of
our planning budget. You know a static planning budget is suitable for planning but is
inappropriate for evaluating how well. If we prepare our planning budget with flexible budget
processing we can easily create our budget eliminates. We also add or drop something so that
reduce our cost and maximum our profit margin.
Characteristics of Flexible Budget:
Flexible budget covers a range of activities
Flexible budget is easy to change according to variations of production and sales levels.
Flexible budget facilitates performance measurement and evaluation.
It takes into account the changes in the volume of activity.
Flexible budget replaces a static budget for control.
Importance of Flexible Budget:
The usefulness or importance of a flexible budget depends very much on the accuracy of
the classification of expenses into fixed, semi-fixed and variable ones. The important
advantages of flexible budget are as follows:
A flexible budget enables the management to analyze the deviation of actual output
from expected output.
The management can compare actual costs at the actual volume with
the budgeted costs at the actual volume.
The flexible budget provides a correct basis for comparison between actual and
expected costs for an actual activity.
Flexible budget helps to fulfill the objectives of cost control as it shows where the actual
performance deviated from the planned performance.
Flexible Budget Variances:
Activity Variance
Revenue Variance
Spending Variance
Activity Variance:
The difference between a revenue or cost item in the static planning budget and the same item
in the flexible budget. An activity variance is due solely to the difference between the level of
activity assumed in the planning budget and the actual level of activity used in the flexible
budget.
Revenue variance:
The difference between how much the revenue should have been given the actual level of
activity, and the actual revenue for the period. A favorable revenue variance occurs because
the revenue is higher than expected, given the actual level of activity for the period.
Spending Variances:
The difference between how much a cost should have been, given the actual level of activity,
and the actual amount of the cost. A favorable spending variance occurs because the cost is
lower than expected, given the actual level of activity for the period.
Flexible Performance Report:
A flexible budget performance report is a management report that compares the actual
revenues and costs for a period with the budgeted revenues and costs based on the actual sales
volume.
In other words, it’s a report that shows the different between the actual company performance
and the budgeted performance for the actual sales volume. Basically, it compares the flexible
budget with the actual results.
Performance report in Nonprofit Organization:
Non-profit organization usually receive a significant amount of funding
from sources other than sales.
Costs, the revenue in governmental and nonprofit organizations may
consist of both fixed and variable elements. The revenue formula is:
Revenue=Quantity x Price
Performance report in cost centers:
Performance reports are often prepared for organizations that do not
have any source of outside revenue.
In particular ,in a large organization a performance report may be
prepared for each department- including departments that do not sell
anything to outsiders.
Exhibit 10.1
Explanations
Exhibit 10.2
Exhibit 10.3
Explanations
Exhibit 10.7
Exhibit 10.7 displays a performance report that
combines the activity variances with the revenue and
spending variances. The report brings together
information from those two earlier Exhibits in a way
that makes it easier to interpret what happened during
the period. The format of this report is a bit different
from the format of the previous reports. In that the
variances appear between the amount being compared
rather than after them.
The performance reports in exhibit 10.7 provides much
more useful information to managers. Then the simple
comparison of budgeted to actual result in exhibit 10.3.
In exhibit 10.3, the effect of changes in activity where
jumbled together with the effects of how well prices
were controlled and operation were managed.
There is only one cost driver – The number
of clients-visits. In the activity based
costing system we found that more than
one cost driver might be needed to
adequately explain of all the cost in an
organization.
Some of the cost are fixed and some of the
costs are depend on the number of
customer served. Employes paid salary,
some are paid hourly basis but not paid on
the no. of customer actually served.
In the flexible budget cost driver are listed-
client visits and hour of operation. Flexible
budget based on both client-visits and
hours of operation.
Exhibit 10.8
Rick’s hairstyling
Flexible budget
For the month ended march 31
Actual client
visits…………………………………………………………...................1100
Actual hours of operation…………………………………………………185
Revenue……………………………........................................... $198000
Expenses:
Wages and salaries……………………………………………………. 105700
Hairstyling supplies………………………………………………………. 1650
Client gratuities……………….................................................... 4510
Electricity………………………………………………………………………1610
Rent…………………………………………………………………………… 28500
Liability Insurance…………………….......................................... 2800
Employee health insurance…………...................................... 21300
Miscellaneous…………………………........................................... 1420
Total expense……………………........................................... 167490
Net operating income…………........................................... 30510
Explanations of Exhibit 10.8:
IN that flexible budget, two cost drivers are
listed client visits and hours of operation.
Where q1 refers to client visits and q2 refers
to hours of operation. For example wages
and salaries depend on the hours of
operation and its cost formula is $65,000+
$220 [Link] the salon actually operated
185 hours, the flexible budget amount for
wages and salaries is
$105,700=(65000+220*1850. The electricity
cost depends on both Clint visits and the
hours of operation and its costs formula is $
390+ $ 0.10q1 + $ 6.00 q2. Since the actual
number of Clint visits was 1100 and the salon
actually operated for 185 hours, the flexible
budgets amount for electricity is = ($ 390 +
$.10 * 1100+ $ 6.* 185) = 1610.
