C1110s - Flexible Budgets and Performance Analysis (Chapter...

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Flexible Budgets and Performance Analysis (Chapter 10)
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The Plan The advantages of flexible budgets. Variances: Static (or planning) budget variance Activity variance Revenue and spending variance Flexible budgets with more than one cost drivers
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Characteristics of Flexible Budgets Planning (or static) budgets are prepared for a single – planned – level of activity. Performance evaluation is difficult when actual  activity differs from the planned level of activity.  Flexible budgets: 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. Improve performance evaluation.
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Deficiencies of the Static Planning Budget: Example 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.
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Deficiencies of the Static Planning Budget Larry’s Planning (or Static) 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
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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
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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)
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C1110s - Flexible Budgets and Performance Analysis (Chapter...

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