Chapter 10

Common errors

Most common errors in preparing performance reports are to.... -Assume that all costs are fixed=This is the error that is made when static planning budget costs are compared to actual costs without any adjustment for the actual level of activity -Assume that all costs are variable=It is not a valid adjustment if the item contains any fixed element -

Flexible Budget Performance report

Provides a more valid assessment of performance than simply comparing static planning budget costs to actual costs because actual costs are compared to what costs should have been at the actual level of activity.

Static planning budget

Suitable for planning but is inappropriate for evaluating how well costs are controlled.

Cost formulas

The difference is that because the cost formulas based on more than one cost driver are more accurate than the cost formulas based on just one cost driver, the variances will also be more accurate.

Cost Centers

-Managers in these departments are responsible for costs, but not revenues -Do not have any source of outside revenue

Difference between Plaining and flexible budget

-Planning budget shows what should have happened at the budgeted level of activity -Flexible budget shows what should have happened at the actual level of activity.

Performance reports in nonprofit organizations

-The performance reports in nonprofit organizations are basically the same as the performance reports we have considered so far -One prominent difference is that Nonprofit organizations usually receive a significant amount of funding from sources other than sales. -Example: Universities receive their funding from sales (i.e., tuition charged to students), from endowment income and donations, and—in the case of public universities—from state appropriations. This means that, like costs, the revenue in governmental and nonprofit organizations may consist of both fixed and variable elements.

Planning budget

A budget created at the beginning of the budgeting period that is valid only for the planned level of activity.

Flexible budget

A report showing estimates of what revenues and costs should have been, given the actual level of activity for the period.

Discrepancy between the budgeted

Activity level

Leverage effect

Because of the existence of fixed costs, net operating income does not change in proportion to changes in the level of activity. There is a leverage effect. The percentage changes in net operating income are ordinarily larger than the percentage increases in activity.

Performance report

Format of this report is a bit different from the format of the previous reports in that the variances appear between the amounts being compared rather than after them. -Combines the activity variances with the revenue and spending variances

Errors lead to

Lead to inaccurate benchmarks and incorrect variances.