If their planning budget assumed classes to be taken, but there were actually classes taken in the time period, how would expenses react? So if more classes are taken, it is a favorable revenue variance, meaning the studio made more money, but an unfavorable wages and salaries variance, as they spent more on wages than budgeted. But was it a good thing to spend more? Even though expenses were higher, the net operating income is higher.
So this is a good thing! This flexible budget allows us to make changes in the expense accounts as the number of classes taken changes. So why did rent and insurance not change?
Remember back to our Hupana Running Company example. This type of budgeting helps us to see how increases in revenue affect net profit. Improve this page Learn More. Skip to main content. For example, suppose a proposed sale of items does not occur because the expected client opted to go with another supplier. In a static budget situation, this would result in large variances in many accounts due to the static budget being set based on sales that included the potential large client.
A flexible budget on the other hand would allow management to adjust their expectations in the budget for both changes in costs and revenue that would occur from the loss of the potential client.
The changes made in the flexible budget would then be compared to what actually occurs to result in more realistic and representative variance.
This ability to change the budget also makes it easier to pinpoint who is responsible if a revenue or cost target is missed.
Big Bad Bikes used the flexible budget concept to develop a budget based on its expectation that production levels will vary by quarter. By the fourth quarter, sales are expected to be strong enough to pay back the financing from earlier in the year. The budget shown in Figure illustrates the payment of interest and contains information helpful to management when determining which items should be produced if production capacity is limited.
Flexible Budgets and Sustainability The ability to provide flexible budgets can be critical in new or changing businesses where the accuracy of estimating sales or usage my not be strong. For example, organizations are often reporting their sustainability efforts and may have some products that require more electricity than other products. The reporting of the energy per unit of output has sometimes been in error and can mislead management into making changes that may or may not help the company.
In theory, a flexible budget is not difficult to develop since the variable costs change with production and the fixed costs remain the same. For example, this article shows some large U. Figure Which budget evaluates the results of operations at the actual level of activity? Figure What is the main difference between static and flexible budgets? Figure A company has prepared the operating budget and the cash budget.
It is now preparing the budgeted balance sheet. Identify the document that contains each of these balances. Figure What information is included in the capital asset budget?
This budget is the plan for the purchase and disposal of plant assets and lists the estimated dollar amounts for each. Figure Cold X, Inc. What would be the budgeted amounts for 20, and 25, units? Figure Using the provided budgeted information for production of 10, and 15, units, prepare a flexible budget for 17, units. What would be the budgeted amounts for 33, and 35, units? Figure Using the following budgeted information for production of 5, and 12, units, prepare a flexible budget for 9, units.
Figure Prepare a flexible budgeted income for , units using the following information from a static budget for , units:. Figure Before the year began, the following static budget was developed for the estimated sales of , Sales are sluggish and management needs to revise its budget. Use this information to prepare a flexible budget for 80, and 90, units of sales. Its expenses are:.
Prepare a flexible budgeted income statement for 75,, 80,, and 85,unit sales. You should be creating flexible budgets, not static ones. Flexible budgets have distinct advantages over static budgets. After you get used to flexible budgets, they will become one of your favorite management tools. First, what is a static budget?
It's a budget that is prepared at the beginning of the year and not changed until it's time to make a new one at the start of the next year. A static budget is just that — static. The numbers do not change for the entire year, regardless of anything that happens in the business environment.
A flexible budget, on the other hand, is a series of budgets prepared for various levels of activities, revenues and expenses. Flexible budgets get modified during the year for actual sales levels, changes in cost of production and virtually any other change in business operating conditions. This flexibility to adapt to change is useful to owners and managers. Variable expenses in flexible budgets are defined as percentages of sales.
0コメント