Static budgets are geared to one level of activity

Static budgets are geared to one level of activity -...

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Static budgets are geared to one level of activity. They work well for evaluating performance when  the planned level of activity is the same as the actual level of activity, or when the budget report is  prepared for fixed costs. However, if actual performance in a given month or quarter is different from  the planned amount, it is difficult to determine whether costs were controlled.  Flexible budgets are one way companies deal with different levels of activity. A flexible budget  provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a  number of static budgets. For example, a restaurant may serve 100, 150, or 300 customers an  evening. If a budget is prepared assuming 100 customers will be served, how will the managers be 
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Unformatted text preview: evaluated if 300 customers are served? Similar scenarios exist with merchandising and manufacturing companies. To effectively evaluate the restaurant's performance in controlling costs, management must use a budget prepared for the actual level of activity. This does not mean management ignores differences in sales level, or customers eating in a restaurant, because those differences and the management actions that caused them need to be evaluated, too. The budget report for the Pickup Trucks Company is a static budget because the budgeted level of units is the same number of units as the original budget. It was not changed for the higher sales level....
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