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Lecture Managerial accounting for managers (4e) - Chapter 10: Flexible budgets and performance analysis

This chapter explores how budgets can be adjusted so that meaningful comparisons to actual costs can be made. This chapter include objectives: Prepare a flexible budget, prepare a report showing activity variances, prepare a report showing revenue and spending variances, prepare a performance report that combines activity variances and revenue and spending variances,. | Flexible Budgets and Performance Analysis Chapter 10 Chapter 9: Flexible Budgets and Performance Analysis This chapter explores how budgets can be adjusted so that meaningful comparisons to actual costs can be made. Learning Objective 10-1 Prepare a flexible budget. Learning objective 10-1 is to prepare a flexible budget. Characteristics of Flexible Budgets Planning budgets are prepared for a single, planned level of activity. 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. A planning budget is prepared before the period begins and is valid for only the planned level of activity. If the actual level of activity differs from what was planned, it would be misleading to evaluate performance by comparing actual costs to the static, unchanged planning budget. Improve performance evaluation. May be prepared for any activity level in the . | Flexible Budgets and Performance Analysis Chapter 10 Chapter 9: Flexible Budgets and Performance Analysis This chapter explores how budgets can be adjusted so that meaningful comparisons to actual costs can be made. Learning Objective 10-1 Prepare a flexible budget. Learning objective 10-1 is to prepare a flexible budget. Characteristics of Flexible Budgets Planning budgets are prepared for a single, planned level of activity. 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. A planning budget is prepared before the period begins and is valid for only the planned level of activity. If the actual level of activity differs from what was planned, it would be misleading to evaluate performance by comparing actual costs to the static, unchanged planning budget. 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 A flexible budget provides estimates of what revenues and costs should be for any level of activity, within a specified range. When used for performance evaluation purposes, actual costs are compared to what the costs should have been for the actual level of activity during the period. This enables “apples-to-apples” cost comparisons. 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 Larry’s Lawn .