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# cost - Chapter8 FlexibleBudgetsand PerformanceAnalysis...

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Click to edit Master subtitle style   8/9/11 Chapter 8 Flexible Budgets and Performance Analysis Joaquin Castillo (10-0085) Valerie Bodden K. (10-0014)

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8/9/11 Learning Objective 1 Prepare a flexible budget. 8-2
8/9/11 Characteristics of Flexible Budgets Planning budgets are prepared for a single, planned level of activity. Obj100      Performance  evaluation is difficult  when actual activity  differs from the  planned level of  activity. Hmm! Comparing static planning budgets with actual costs is like comparing apples and oranges. Obj101 8-3

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8/9/11 Improve performance evaluation. May be prepared for any activity level in the relevant range. Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons. Help managers control costs. Let’s look at Larry’s Lawn Service. Characteristics of Flexible Budgets 8-4
8/9/11 Larry’s Lawn Service provides lawn care in a planned  community where all lawns are approximately the same size. At the end of May, Larry prepared his June budget based on mowing 500 lawns.  Since all of the lawns are similar in size, Larry felt that the number of lawns mowed in a month would be the best way to measure overall activity for his business. Larry’s Budget Deficiencies of the Static Planning Budget 8-5

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8/9/11 Deficiencies of the Static Planning Budget Larry’s Planning Budget Revenue/Cost Planning Formulas Budget Number of lawns (Q) 500 Revenue (\$75Q) 37,500 \$ Expenses: Wages and salaries (\$5,000 + \$30Q) 20,000 \$ Gasoline and supplies (\$9Q) 4,500 Equipment maintenance (\$3Q) 1,500 Office and shop utilities (\$1,000) 1,000 Office and shop rent (\$2,000) 2,000 Equipment Depreciation (\$2,500) 2,500 Insurance (\$1,000) 1,000 Total expenses 32,500 Net operating income 5,000 \$ Larry's Lawn Service For the Month Ended June 30 8-6
8/9/11 Deficiencies of the Static Planning Budget Actual Results Number of lawns 550 Revenue 43,000 \$ Expenses: Wages and salaries 23,500 \$ Gasoline and supplies 5,100 Equipment maintenance 1,300 Office and shop utilities 950 Office and shop rent 2,000 Equipment Depreciation 2,500 Insurance 1,200 Total expenses 36,550 Net operating income 6,450 \$ Larry's Lawn Service For the Month Ended June 30 Larry’s Actual Results 8-7

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8/9/11 Deficiencies of the Static Planning Budget Revenue/Cost Planning Actual Formulas Budget Results Variances Number of lawns (Q) 500 550 Revenue (\$75Q) 37,500 \$ 43,000 \$ 5,500 \$ F Expenses: Wages and salaries (\$5,000 + \$30Q) 20,000 \$ 23,500 \$ 3,500 \$ U Gasoline and supplies (\$9Q) 4,500 5,100 600 U Equipment maintenance (\$3Q) 1,500 1,300 200 F Office and shop utilities (\$1,000) 1,000 950 50 F Office and shop rent (\$2,000) 2,000 2,000 - Equipment Depreciation (\$2,500) 2,500 2,500 - Insurance (\$1,000) 1,000 1,200 200 U Total expenses 32,500 36,550 4,050 U Net operating income 5,000 \$ 6,450 \$ 1,450 \$ F Larry's Lawn Service For the Month Ended June 30 Larry’s Actual Results Compared with the Planning Budget Obj105 8-8
8/9/11 Revenue/Cost Planning Actual Formulas Budget Results Variances Number of lawns (Q) 500 550 Revenue (\$75Q) 37,500 \$ 43,000 \$ 5,500 \$ F Expenses: Wages and salaries (\$5,000 + \$30Q) 20,000 \$ 23,500 \$ 3,500 \$ U Gasoline and supplies (\$9Q) 4,500 5,100 600 U Equipment maintenance (\$3Q) 1,500 1,300 200 F Office and shop utilities (\$1,000) 1,000 950 50

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