What is a Flexible Budget Performance Report?

The flexible budget amounts for sales revenue and selling and administrative expenses come from a flexible sales budget (not shown) for 19,000 units of sales. A flexible budget allows volume differences to be removed from the analysis since we are using the same actual level of activity for both budget and actual. We will need to determine the budgeted variable cost per unit for each variable cost. Budgeted fixed costs would remain the same because they do not change based on volume. The report process starts by gathering the actual performance information from the period. Assume Jack’s Guitar Factory produces 1,000 guitars this year and had material costs of $250,000.

Planning budgets

Before we look at the sales volume variance, check your understanding of the flexible (cost and price) budget variance. A budget performance report is important because it provides critical insights into how effectively and efficiently resources are being used. It helps identify areas where the organization is over or underperforming against its plans, guiding strategic decisions and financial management. Next up, pinpoint the main drivers that affect cost and revenue changes in your business.

Practice Video Problem 1:  Preparing a planning budget

Planning budgets are prepared before the budgeted time period begins. For this reason, recording transactions the amounts used to construct the planning budgets are estimates, not actual amounts. Organizations use historical data along with sales and production projections to make the estimates used in the planning budgets. In Exhibit 7 we compare the actual results with the planned operating budget. Comparison of actual results with the planned operating budget yields some useful information because it shows where actual performance deviated from planned performance.

Compare and Gather Data

But it is difficult to determine how much higher revenue and expenses should be or if revenue targets and expense limitations were in fact met. The March planning budget for Wanda’s furniture repair shop, ReStore, was prepared in the first practice video problem. On April 1st the actual results for the month of March were available. She originally planned to repair 120 pieces of furniture during March but she actually repaired 145 pieces of furniture. Using the revenue formula and cost formulas for the shop, prepare a flexible budget for March.

Instead, the flexible operating budget may show the number of units actually sold multiplied by the budgeted unit cost of direct materials, direct labor, and manufacturing overhead. This budget also shows actual costs for direct materials, direct labor, and manufacturing overhead for the number of units sold. Using the performance budget data from Exhibit 3, Exhibit 7 and Exhibit 8, present Leed’s detailed planned operating budget and flexible operating budget for the quarter ended 2010 March 31. The planned operating budget was based on a sales forecast of 20,000 units and a production forecast of 25,000 units.

Module 9: Operating Budgets

It could be units produced, units sold, hours worked – whatever the primary lever is. When department heads and managers are evaluated based on performance against a flexible budget, it creates a fairer and more realistic basis for accountability. This can motivate employees to achieve budgetary goals that accurately reflect their level of activity.

Practice Video Problem 3: Prepare a flexible budget performance evaluation report and analyze the variances

• Revenue and spending variances are used to evaluate how well the organization achieved revenue, cost, and profit targets.
• The budget performance is there for a reason, and let’s find out what it is.
• Both variable and fixed selling andadministrative expenses were lower than expected.
• We call this an unfavorable variance and will identify it with the letter U.
• (As is typically the case, the budgeted and actualamounts are not equal.) The actual selling price was USD 20 perunit, the same price that management had forecasted.
• In other words, you can pump more investment into the areas firing on all cylinders, while doubling down on addressing inefficiencies elsewhere.
• On April 1st the actual results for the month of March were available.

The flexible budget performance report offers several benefits that make it a valuable tool for businesses seeking to manage their operations and finances more effectively. The comparison of actual results with the plannedoperating budget does not provide a basis for evaluating whether ornot management performed efficiently at the actual level ofoperations. For example, in Exhibit 7, the cost of goods sold wasUSD 7,500 less than expected. Flexible budget variances are the discrepancies found when comparing the planning budget, flexible budget, and actual operating results. This report allows management to understand where costs differed from what would have been expected given the actual level of output, and investigate why these variances occurred.

Costs and revenues are classified into one of three categories of behavior—variable, fixed, or mixed. Variable costs or revenues are the same amount per unit but the total amount depends on quantity. Fixed costs or revenues are the same in total regardless of quantity but the per unit amount changes depending on the quantity. Most revenues are considered variable so only costs are discussed in the following category descriptions.

Thisresult does not necessarily mean that Leed had an unfavorablevariance of USD 600. Amara uses the revenue and cost formulas Bookkeeping for Veterinarians given in Exhibit 7-1 to compile the planning budget income statement. The planning budget income statement is provided in Exhibit 7-2 below. The cost formula for a variable cost is the cost per unit times the activity driving the cost, usually sales or production. For example, assume that shipping costs are $4 for every unit sold.