Understanding Flexible Budgets and Variance Analysis

Sep 11, 2024

Lecture Notes: Flexible Budgets

Introduction

  • Flexible Budgets: Connected to budgeting and variance analysis.
    • Budgeting looks forward (planning for future).
    • Variance analysis looks backward (actual results vs budgeted expectations).
    • Flexible budgets apply budgeting for past analysis to assess performance.

Example Scenario

  • A head greenskeeper at a golf course with a budget of $500,000.
    • Budget based on 250 open days (dependent on weather conditions).
    • Actual open days: 300 (warmer season than usual).
    • Expenditures were higher than budget due to more open days.

Budget vs Actual Expenditures

  • Planned Costs: $500,000 for 250 days.
  • Actual Costs: $530,000 for 300 days.
    • Wages: $275,000 (planned: $250,000)
    • Supplies: $110,000 (planned: $100,000)
    • Equipment Depreciation: $145,000 (planned: $150,000)
  • Variance Analysis (initial):
    • Wages: $25,000 unfavorable.
    • Supplies: $10,000 unfavorable.
    • Depreciation: $5,000 favorable.
    • Overall: $30,000 over budget.

Flexible Budget Analysis

  • Adjust budget expectations for actual open days (300 days).
    • Flexible Budget Calculations:
      • Wages for 300 days: $300,000.
      • Supplies for 300 days: $120,000.
      • Depreciation: Remain at $150,000 (adjustments for equipment not considered).
    • Flexible Budget Total: $570,000.
    • Comparison with Actual:
      • Wages: $25,000 favorable (spent $275,000 vs $300,000 in flexible budget).
      • Supplies: $10,000 favorable (spent $110,000 vs $120,000 in flexible budget).
      • Depreciation: $5,000 favorable (spent $145,000 vs $150,000 planned).
      • Overall: $40,000 favorable.

Key Learnings

  • Flexible budgets offer realistic performance assessments by adjusting for actual activity levels (e.g., more open days).
  • Provides a clearer picture of cost control and operational efficiency.
  • Useful for discussions with management about performance and budget adherence.
  • Important tool for understanding company performance retrospectively.

Conclusion

  • Flexible budgets are essential for accurate variance analysis.
  • They help in understanding the actual performance and controlling costs effectively.
  • Module focuses on using flexible budgets to improve budget analysis.