ACCT 2020 1st Edition Lecture 16 Outline of Last Lecture I Budgeting II Cash Budgeting Outline of Current Lecture I Flexible Budgets II Variances III Application of Concepts IV Flexible Budgets V Examples Current Lecture I Flexible Budgets All previously discussed budgets are based on single level of activities what if we are able to see more or less than we thought we would Because the budget is based on one level of activity it is difficult to measure performance Were we able to control costs Were we able to sell at the proper price Because of this we prepare a flexible budget that can be prepared at any level at the relevant range assuming fixed costs stay the same The flexible budget shows us the scenario for many levels of activity Shows the costs at the actual level of activity to what it should have been given the level of activity If we sell 1200 units what are our costs Because we are comparing apples to apples we can measure costs more accurately These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best Used as a supplement to your own notes not as a substitute The steps are to compare the planned budget with the actual results We can t compare the variable costs due to the increased level of activities Each variance is labeled with either an F favorable or U unfavorable Anything that relates positively to revenue or net income is Favorable anything that negatively detracts from revenue or net income is Unfavorable Really what we want to know if how much of the variances are due to activity and how much of the variances are due to not being able to control the cost We want to have variances that measure these differences In order to prepare a flexible budget we have to change variable cost s for new level of activity II Variances Compare the Planning Budget to the Flexible budget to see the variances due to activity In the example they increase by more than 10 due to the fixed costs When we compare the flexible budget the actual results we can see the revenue variances in changes in revenue and expense variances are spending variances Spending variances compared with the other variances show us our actual costs III Application of Concepts Non profit organizations do this type of analysis They will have more than revenue but have donations endowments and pretty much all cash inflows We also have some departments that have no revenue r net operating income variances We can do flexible budgets for these but without revenue lines Flexible budgets with multiple cost drivers just use different equation IV Flexible Budgets DO NOT assume that all costs are variable or all costs are fixed In most companies this will be a bad assumption If you assume that all costs are variable then you would ignore the lack of direct proportion of these costs V Examples Exercise 7 o Assuming that all costs are variable All increasing by 4 would be incorrect because some are fixed and do not change with the level of activity Exercise 3 o Revenue Variance 800 U o Spending Variance Packing and Supplies 170 U Oyster Bed Maint 140 F Wages Sales 410 U Shipping 270 F Utilities Other 90 F 520 U Net Operating Income 1 400 Unfavorable Variance