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Unformatted text preview: ACC550 CHAPTER 7 FLEXIBLE BUDGETS, DIRECT COST VARIANCES & MGT CONTROL Static and flexible budgets 1) Static budget a) A static budget reflects expected revenues and costs at the master budget activity level b) This activity level represents the level of output planned at the beginning of the budget period c) Differences between the planned activity level and the actual activity level are not taken into consideration 2) Flexible budget a) A flexible budget reflects expected revenues and costs at the ACTUAL activity level experienced during the period b) This allows management to see what the master budget WOULD HAVE looked like if it was prepared using the actual activity level c) Cost center managers are held responsible for meeting the flexible budget Expanded discussion A budget represents expected results. As such, a budget is a tool for meeting financial goalsit allows us to hold management accountable for the costs they incur. A static budget reflects expected results at the level of activity planned at the beginning of the period. The master budget we learned about earlier is an example of a static budget. The various components of the master budget are typically prepared using an activity level based on the static revenues budget. The problem with a static budget is that the activity level upon which it is based is an estimate. For example, a revenues budget reflects estimated sales for the coming period, and a production budget represents estimated production based on those estimated sales. By the time the period is actually over, there will most likely be a difference between the actual activity level and the static budget activity level. As such, the static budget may not be representative of the costs we would EXPECT to incur at the ACTUAL activity level we experience.this limits its usefulness as a tool for controlling costs. A flexible budget is prepared at the END of the period using the actual level of activity experienced during the period. We essentially take the static budget and recast it using the actual activity level that occurred during the period. This lets us see what the static budget WOULD HAVE LOOKED LIKE if we had used the actual activity level to prepare it. Flexible budget costs 1) Variable costs a) Total variable costs are expected to change in direct proportion to changes in activity level b) Total variable costs are restated based on the actual activity level experienced during the period Total flexible budget variable cost = STATIC BUDGET variable cost PER UNIT x actual activity level Discussion point: Be sure to understand that the variable cost PER UNIT does not change from the static budget to the flexible budget. Rather, it is the TOTAL variable cost that changes due to the difference between the static budget activity level and the actual activity level....
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- Spring '09