Exhibit 8 shows the comparison of Leed’s flexibleoperating budget with the actual results. Note that the flexiblebudget in Exhibit 8 is made up of several pieces. The flexiblebudget amounts for sales revenue and selling and administrativeexpenses come from a flexible sales budget (not shown) for 19,000units of sales.
Analyzing activity variances LO6
Variable costs are the same cost per unit but the total cost depends on the quantity produced, used, or sold. Cost behavior is how a cost reacts to changes in production, usage, or sales quantity. The most basic thing you can do is to compare and gather enough data to support your report.
Analyzing revenue and spending variances LO7
- A flexible budget performance report reflects the variance between budgeted and actual amounts for a given level of activity.
- By evaluating variances, management gains visibility into areas where performance is exceeding or falling short of expectations.
- However, Leed’s actualmaintenance costs may have been USD 6,200 for the period.
- The static budget remains unchanged throughout the period, whereas the flexible budget adjusts automatically to changes in activity levels.
- The full report looks very similar to a multiple period comparative income statementwith variance indicated in the right column.
- However, the frequency may vary depending on the needs and size of the company.
(As is typically the case, the budgeted and actual amounts are not equal.) The actual selling price was USD 20 per unit, the same price that management had forecasted. A flexible budget allows volume differences to be removed from the analysis since we are using the same actual level of activity for both budget and actual. We will need to determine the budgeted variable cost per unit for each variable cost. Budgeted fixed costs would normal balance remain the same because they do not change based on volume.
Video Illustration 7-2: Incompatibility of planning budgets and actual results for performance evaluation LO3
This report is essential in financial analysis, providing insights into the effectiveness of budgeting processes and the organization’s overall financial performance. By following these best practices, businesses can ensure their flexible budget performance reports provide meaningful insights for better financial control and strategic decision-making. Unlike its stiff counterpart, a flexible budget performance report is designed to adapt and shift as the levels of activity within your business change.
Example Variance Table
Furthermore, Car Dealership Accounting the analysis of price variance can provide valuable insight into the impact of pricing decisions on overall profitability, informing future pricing strategies for maximum revenue generation. Using the data from Exhibit 3, Exhibit 7 andExhibit 8, present Leed’s detailed planned operating budget andflexible operating budget for the quarter ended 2010 March 31. Theplanned operating budget was based on a sales forecast of 20,000units and a production forecast of 25,000 units. Exhibit 7 andExhibit 8 show actual sales of 19,000 units and actual productionof 25,000 units. (As is typically the case, the budgeted and actualamounts are not equal.) The actual selling price was USD 20 perunit, the same price that management had forecasted.
- This can motivate employees to achieve budgetary goals that accurately reflect their level of activity.
- They provide insights into the differences between actual and budgeted figures.
- To prepare a flexible budget report, start by identifying variable costs per unit of activity and fixed costs.
- Note that the flexible budget in Exhibit 8 is made up of several pieces.
- While planning budget quantities are usually close to actual results, it is nearly impossible to accurately predict what the actual sales quantity will be before the period begins.
- Activity variances are the difference between the planning budget and the flexible budget.
Retail Company
- The March planning budget for Wanda’s furniture repair shop, ReStore, was prepared in the first practice video problem.
- Organizations can gain a clearer understanding of their financial performance by dissecting the sources of variances.
- The most basic thing you can do is to compare and gather enough data to support your report.
- This involves adjusting the budgeted costs and revenues to reflect the actual activity levels.
Note that the flexible budget in Exhibit 8 is made up of several pieces. The flexible budget amounts for sales revenue and selling and administrative expenses come from a flexible sales performance budget budget (not shown) for 19,000 units of sales. The logic used to analyze spending variances is the opposite of the logic used for revenue variances.