Download - Fixed budget
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 1/43
© 2012 McGraw-Hill Education (Asia)Garrison, Noreen, Brewer, Cheng & Yuen
Flexible Budgets and
Performance AnalysisChater !!
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 2/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 2
"earning #b$ecti%e !
Prepare a fei!lePrepare a fei!le
!ud"et#!ud"et#
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 3/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 3
Characteristics of Flexible Budgets
Planning budgetsare reared for
a single, lannedle%el of acti%ity
Performancee%aluation is difficultwhen actual acti%ity
differs from thelanned le%el of
acti%ity
'mm( Comaringstatic lanning budgets
with actual costsis li)e comaring
ales and oranges
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 4/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 4
*mro%e erformance e%aluation
+ay be reared for any acti%ityle%el in the rele%ant range
how costs that should ha%e beenincurred at the actual le%el of acti%ity, enabling -ales to ales.cost comarisons
'el managers control costs
Let’s look at Larry’s Lawn Service.
Characteristics of Flexible Budgets
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 5/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 5
"arry/s "awn er%ice ro%ides lawn care in a lannedcommunity where all lawns are aroximately the same si0e At the end of +ay, "arry reared his 1une budget based onmowing 233 lawns ince all of the lawns are similar in si0e,"arry felt that the number of lawns mowed in a month wouldbe the best way to measure o%erall acti%ity for his business
"arry/s "awn er%ice ro%ides lawn care in a lannedcommunity where all lawns are aroximately the same si0e At the end of +ay, "arry reared his 1une budget based onmowing 233 lawns ince all of the lawns are similar in si0e,
"arry felt that the number of lawns mowed in a month wouldbe the best way to measure o%erall acti%ity for his business
Larry’s Budget
4eficiencies of the tatic Planning Budget
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 6/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 6
4eficiencies of the tatic Planning BudgetLarry’s Planning Budget
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 7/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 7
4eficiencies of the tatic Planning BudgetLarry’s Actual Results
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 8/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 8
4eficiencies of the tatic Planning BudgetLarry’s Actual Results Compared with the Planning Budget
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 9/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 9
4eficiencies of the tatic Planning BudgetLarry’s Actual Results Compared with the Planning Budget
F Favora!le variance that occurs whenactual costs are less than !udgeted costs.
" "n#avora!le variance that occurs whenactual costs are greater than !udgeted costs.
F Favora!le variance that occurs when actualrevenue is greater than !udgeted revenue.
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 10/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 10
4eficiencies of the tatic Planning BudgetLarry’s Actual Results Compared with the Planning Budget
Since these variances are #avora!le$ hasLarry done a good %o! controlling costs&
Since these variances are un#avora!le$ hasLarry done a poor %o! controlling costs&
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 11/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 11
* don/t thin) *can answer the5uestions usinga static budget
Actual acti%ity is abo%elanned acti%ity
o, shouldn/t the %ariable
costs be higher if actualacti%ity is higher6
4eficiencies of the tatic Planning Budget
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 12/43
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 13/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 13
'ow a Flexible Budget 8or)s
7o a budget we need to )now that9
7otal %ariable costs change
in direct roortion tochanges in acti%ity
7otal fixed costs remainunchanged within the
rele%ant range Fixed
: a r i a
b l e
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 14/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 14
Let’s prepare a
!udget#or Larry’s LawnService.
Let’s prepare a !udget#or Larry’s Lawn
Service.
'ow a Flexible Budget 8or)s
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 15/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 15
Prearing a Flexible BudgetLarry’s Fle*i!le Budget
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 16/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 16
;uic) Chec)
8hat should the total wages and salaries costbe in a flexible budget for <33 lawns6
a =!>,333
b =?3,333c =?@,333
d =?2,333
8hat should the total wages and salaries costbe in a flexible budget for <33 lawns6
a =!>,333
b =?3,333c =?@,333
d =?2,333
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 17/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 17
;uic) Chec)
8hat should be the total wages and salariescost in a flexible budget for <33 lawns6
a =!>,333
b =?3,333c =?@,333
d =?2,333
8hat should be the total wages and salariescost in a flexible budget for <33 lawns6
a =!>,333
b =?3,333c =?@,333
d =?2,333
7otal wages and salaries cost
=2,333 =@3 er lawn <33 lawnsD
=2,333 =!>,333 =?@,333
8hat should the total wages and salaries costbe in a flexible budget for <33 lawns6
a =!>,333
b =?3,333c =?@,333
d =?2,333
8hat should the total wages and salaries costbe in a flexible budget for <33 lawns6
a =!>,333
b =?3,333c =?@,333
d =?2,333
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 18/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 18
"earning #b$ecti%e ?
Prepare a reportPrepare a report
s$owin" acti%it&s$owin" acti%it&
%ariances#%ariances#
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 19/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 19
Acti%ity :ariances
Planning budget re%enues
and exenses
Flexiblebudget re%enues
and exenses
7he differences between7he differences betweenthe budget amounts arethe budget amounts are
called acti%ity %ariancescalled acti%ity %ariances
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 20/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 20
Let’s use !udgeting
concepts to compute activityvariances #or Larry’s Lawn Service.
Let’s use !udgeting
concepts to compute activityvariances #or Larry’s Lawn Service.
Acti%ity :ariances
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 21/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 21
Acti%ity :ariancesLarry’s Fle*i!le Budget Compared with the Planning Budget
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 22/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 22
Acti%ity :ariancesLarry’s Fle*i!le Budget Compared with the Planning Budget
Acti%ity and re%enue increase by !3 ercent, but net oerating incomeincreases by more than !3 ercent due to the resence of fixed costs
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 23/43McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 23
"earning #b$ecti%e @
Prepare a reportPrepare a report
s$owin" re%enue ands$owin" re%enue and
spendin" %ariances#spendin" %ariances#
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 24/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 24
Ee%enue and ending :ariances
Flexible budget re%enue Actual re%enue
+he di##erence is a revenue variance.+he di##erence is a revenue variance.
Flexible budget cost Actual cost
+he di##erence is a spending variance.+he di##erence is a spending variance.
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 25/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 25
,ow$ let’s use !udgeting
concepts to compute revenue andspending variances #or Larry’s Lawn
Service.
,ow$ let’s use !udgeting
concepts to compute revenue andspending variances #or Larry’s Lawn
Service.
Ee%enue and ending :ariances
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 26/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 26
Ee%enue and ending :ariancesLarry’s Fle*i!le Budget Compared with the Actual Results
-$/01 #avora!le-$/01 #avora!le
revenue variancerevenue variance
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 27/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 27
Larry’s Fle*i!le Budget Compared with the Actual Results
Ee%enue and ending :ariances
Spendingvariances
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 28/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 28
"earning #b$ecti%e
Prepare a per'orancePrepare a per'orance
report t$at co!inesreport t$at co!ines
acti%it& %ariances andacti%it& %ariances and
re%enue and spendin"re%enue and spendin"%ariances#%ariances#
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 29/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 29
,ow$ let’s use !udgeting
concepts to com!ine the revenue andspending variances reports #or Larry’s
Lawn Service.
,ow$ let’s use !udgeting
concepts to com!ine the revenue andspending variances reports #or Larry’s
Lawn Service.
A Performance Eeort Combining Acti%ityand Ee%enue and ending :ariances
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 30/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 30
A Performance Eeort Combining Acti%ityand Ee%enue and ending :ariances
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 31/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 31
A Performance Eeort Combining Acti%ityand Ee%enue and ending :ariances
23 lawns =H2 er lawn 23 lawns =@3 er lawn
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 32/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 32
A Performance Eeort Combining Acti%ityand Ee%enue and ending :ariances
=@,333 actual I =!,?23 budget
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 33/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 33
Performance Eeorts in NonIProfit#rgani0ations
NonIrofit organi0ations may recei%e funding fromsources other than the sale of goods and ser%ices,
so re%enues may consist of both fixed and
%ariable elements
NonIrofit organi0ations may recei%e funding fromsources other than the sale of goods and ser%ices,
so re%enues may consist of both fixed and
%ariable elements
Jni%ersities
7uition and fees
4onationstate funding
Kndowments
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 34/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 34
Performance Eeorts in Cost Centers
Performance reorts are often rearedfor cost centers 7hese reorts should be
reared using the same rinciles
discussed so far, excet for the fact thatthese reorts will not contain re%enue or
net oerating income %ariances
Performance reorts are often rearedfor cost centers 7hese reorts should be
reared using the same rinciles
discussed so far, excet for the fact thatthese reorts will not contain re%enue or
net oerating income %ariances
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 35/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 35
"earning #b$ecti%e 2
Prepare a fei!lePrepare a fei!le
!ud"et wit$ ore t$an!ud"et wit$ ore t$an
one cost dri%er#one cost dri%er#
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 36/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 36
2ore than one costdriver may !e needed toade3uately e*plain all o#
the costs in an organi4ation.
2ore than one costdriver may !e needed toade3uately e*plain all o#
the costs in an organi4ation.
+he cost #ormulas used
to prepare a #le*i!le!udget can !e ad%ustedto recogni4e multiple
cost drivers.
+he cost #ormulas usedto prepare a #le*i!le
!udget can !e ad%ustedto recogni4e multiple
cost drivers.
Flexible Budgets with +ultile Cost 4ri%ers
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 37/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 37
Because of the large unfa%orable wages and salaries sending%ariance, "arry decided to add an additional cost dri%er for
wages and salaries 7he %ariance is due rimarily to the numberof hours re5uired for the additional edging and trimming o
"arry estimates the additional hours and builds those hours intoboth his re%enue and exense budget formulas
Because of the large unfa%orable wages and salaries sending%ariance, "arry decided to add an additional cost dri%er for
wages and salaries 7he %ariance is due rimarily to the numberof hours re5uired for the additional edging and trimming o
"arry estimates the additional hours and builds those hours intoboth his re%enue and exense budget formulas
Larry’s ,ew Budget
Flexible Budgets with +ultile Cost 4ri%ers
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 38/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 38
Flexible Budgets with +ultile Cost 4ri%ers
Larry’s Budget Based on 2ore than 5ne Cost 6river
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 39/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 39
"earning #b$ecti%e <
nderstand coonnderstand coon
errors ade inerrors ade in
preparin" per'orancepreparin" per'orance
reports !ased onreports !ased on!ud"ets and actual!ud"ets and actual
results#results#
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 40/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 40
ome Common Krrors
7he most common errors in rearing erformancereorts are to imlicitly assume that9! All costs are fixed or that? All costs are %ariable
7he most common errors in rearing erformancereorts are to imlicitly assume that9! All costs are fixed or that? All costs are %ariable
Assume all costs are #i*ed.
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 41/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 41
Common Krror !9 Assuming All Costs AreFixed
Faulty Analysis Comparing Budgeted Amounts to Actual Amounts
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 42/43
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & YuenMcGraw-Hill/Irwin Slide 42
Common Krror ?9 Assuming All Costs Are:ariableFaulty Analysis that Assumes All !udget 7tems Are 8aria!le
7/21/2019 Fixed budget
http://slidepdf.com/reader/full/fixed-budget 43/43
Knd of Chater !!