Chapter 9: Flexible Budgets & Performance Analysis

Options to generate a favorable revenue and spending variance include:

- reduce the prices of inputs - increase operating efficiency - protecting the selling price

The flexible budget performance report consists of:

- revenue and spending variances - the planning budget, flexible budget and actual results - activity variances

Comparing actual costs to what the costs should have been for the actual activity level of activity is done on what budget?

Flexible budget

If management plans the budget based on 40 hours of operation and weather causes the business to be opened for only 32, what needs to be adjusted on the flexible budget?

Hourly Wages

Spending variance:

Difference between what a cost should have been at the actual level of activity and the actual amount of the cost

The difference between a revenue or cost item in the planning budget and the same item in the flexible budget at the actual level of activity is an

activity variance

A flexible budget performance report combines the:

activity variances with the revenue and spending variances

When preparing a flexible budget, the level of activity ...

affects variable costs only

To understand why actual net operating income differs from what it should have been at the activity level of activity, the _______ variances should be analyzed.

revenue and spending

The difference between what the total sales should have been, given the actual level of activity for the period, and the actual total sales is what variance?

revenue variance

An unchanged planning budget is known as an _______ planning budget.

static

Fancy Nails' cost formula for electricity is $40 per operating day plus $0.15 per client served. Calculate Fancy Nails' electricity budget in a month when the business is going to be open for 24 days and they expect to serve a total of 2,100 clients.

$1,275 ($40 per day x 24 days + $0.15 per client x 2,100 clients)

Comparing the static planning budget to actual results only makes sense when :

- all costs are fixed - the actual activity level is the same as the budgeted activity level

The spending variance is labeled as favorable when the:

actual cost is less than what the cost should have been at the actual level of activity

Fancy Nail's Monthly rent is $2,500. The company's static budget for March was based on the activity level of 2,000 manicures. Total sales was budgeted at $40,000 and nail tech wages (a variable cost based on the number of manicures) was budgeted at $20,000. Actual manicures in March totaled 2,200. Assuming no other expenses, Fancy Nail's flexible budget will show:

- Net operating income of $19,500 ($44,000 - $22,000 - $2,500) - Sales of $44,000 (Sales = $20 per manicure ($40,000/2,000) x 2,200)

A cost center's performance report does not include

- net operating income - revenue

Commission expense is budgeted to be $16,000 at a planned sales level of 4,000 units. If only 2,900 units are sold, how much commission expense will appear on the flexible budget, and is the activity variance favorable or unfavorable?

$11,600 and favorable (Flexible budget expense = $16,000/4,000 = $4.00 per unit x 2,900 units = $11,600. since the flexible budget expense < planning budget expense, the variance is favorable.

Fancy Nails' budgeted revenue is $20 per manicure. The planning budget for June was based on 2,400 manicures. During June, the actual revenue was $49,750 for 2,500 manicures. The revenue variance for June was:

$250 U (flexible budget for June = $20 per manicure x 2,500 manicures = $50,000 revenue variance = $50,000 - $49,750 = $250 U)

If the activity level for the month is 4,000 units, actual revenue is $6,000, actual variable costs are $0.20 unit, and actual fixed costs total $500, what's true?

- $1,300 in costs (4,000 units x $0.20 + $500 = $1,300) - $4,700 net income ($6,000 - (4,000 x $0.20) - $500 = $4,700)

Unfavorable Variance

Actual revenue is less than budgeted revenue

Favorable Variance

Actual revenue is more than budgeted revenue

Revenue and Spending Variance

Subtract flexible budget from actual results

Activity Variance

Subtract planning budget from flexible budget

Companies use the ______ _________ cycle to evaluate and improve performance.

Variance Analysis

A revenue variance is the:

difference between what revenue should have been at the actual level of activity and the actual revenue

A favorable activity variance may not indicate good performance because a favorable activity variance:

for a variable cost will occur simply because the actual level of activity is less than the budgeted level of activity

The concept that focuses on important variances and ignores trivial ones is:

management by exception

Variances are more accurate when using:

multiple cost drivers

Nonprofit organizations:

- May have revenue sources that are fixed - Usually have significant funding sources other than sales

A performance report shows that the planned revenue was $200,000, the flexible budget was $225,000 and the actual revenue was $223,000. What is true?

- The revenue variance is is $2,000 unfavorable - The activity variance is $25,000 favorable

The variance analysis cycle:

begins with the preparation of performance reports

Giving planning budget revenue of $284,000, actual revenue of $275,000, and flexible budget revenue of $290,000, there is a(n) ________ activity variance.

favorable

Unfavorable activity variance may not indicate bad performance because:

Increased activity should result in higher variable costs

Because of fixed costs, net operating income does not change in proportion to changes in the level of activity which is the _______ effect.

Leverage effect