ac102_ch8 - Revised Summer 2010 CHAPTER 8 FLEXIBLE BUDGETS...

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Revised Summer 2010 Page 1 of 15 CHAPTER 8 FLEXIBLE BUDGETS AND PERFORMANCE ANALYSIS Key Terms and Concepts to Know Static or Planning Budgets Used for planning purposes Prepared at the beginning of the period Based on one projected level of activity Flexible Budgets Used for control purposes Prepared at the end of the period “Flexed” to accommodate actual level of production Uses cost (variable and fixed) and revenue formulas from static budget Activity Variance Difference between a revenue or cost item in the static budget and the same item in the flexible budget. Results from the difference between the level of activity assumed in the planning budget and the actual level of activity used in the flexible budget. Revenue Variance Difference between how much the revenue should have been at the actual level of activity and the actual revenue for the period. Favorable revenue variance occurs when the revenue is greater than expected at the actual level of activity for the period. Unfavorable revenue variance occurs when the revenue is less than expected at the actual level of activity for the period. Spending Variance Difference between how much an expense should have been at the actual level of activity and the actual amount of expense incurred. Favorable spending variance occurs when the cost is less than expected at the actual level of activity for the period. Unfavorable spending variance occurs when the cost is greater than expected at the actual level of activity for the period.
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Revised Summer 2010 Page 2 of 15 Key Topics to Know Actual Performance vs. Planning Budget The planning or static budget is a “best guess” as to what the actual performance will be during the budget period. Needless to say, rarely does actual performance match the planning budget. The differences between the planning budget and actual performance are due to two basic causes: differences in activity level and differences in spending. To bridge the gap between planning budget and actual performance and to isolate each difference, a flexible budget is constructed based on the actual level of activity and the revenue and cost formulas from the planning budget. The revenue and cost formulas are developed as follows; o If the static budget expected to sell 100 units at a price of $30 per unit, then $30 would be the per-unit revenue formula for any number of units sold. o If the static budget expected total variable costs to be 100 units sold at a cost of $18 per unit, then $18 would be the per-unit variable cost formula for any number of units sold. o If the static budget expected total fixed costs to be $700, then $700 will be the budgeted fixed costs at any level of activity within the relevant range of activity. The differences between the static and flexible budgets are due to the difference
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This note was uploaded on 06/01/2011 for the course ACCOUNTING 102 taught by Professor All during the Spring '11 term at Harper.

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ac102_ch8 - Revised Summer 2010 CHAPTER 8 FLEXIBLE BUDGETS...

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