Welcome to our module on flexible budgets. This module is related to our budgeting module, and it's also related to our variance analysis module. Budgets always look forward, right? We're sort of planning for the future.
We're planning ahead. Variance analysis looks backwards. Flexible budgets use budgeting to look backwards. And I'm going to give you an example.
And again, this is like so many of my examples based on a true story. All the numbers are made up in Some elements of the scenario are made up, but it's generally true enough for our purposes. So I've got a friend who is a greenskeeper at a golf course, a fancy golf course, and he was the head greenskeeper.
And he told me one day he's kind of proud he has this budget. You know, his his area has like half a million dollars budget just to keep the golf greens green and, you know, looking good. And that's he's in charge of a team.
And this was roughly the budget. And the budget was based. on being open uh uh 250 days now his golf course you know dealing with climate change they they don't shut down they don't have like a set schedule it's all about like what are when it gets snowy or frosty in canada right that's really what it's all about if if uh the snow has melted in the spring great and if the snow uh is You know, if it doesn't come until later, great. More golf days or less golf days are going to depend on when frost sets in on the golf course. And it turned out the season he was talking about, so this is the budget, 250 days.
The actual season, they golfed 300 days. It was just a warmer than usual season. Only a couple months where it was under snow and ice and it was frozen.
But they actually were open 300 days. And as a consequence. you know they had different results from what they budgeted they spent two hundred and seventy five thousand dollars on wages they spent a hundred and ten thousand dollars on supplies that was uh three hundred and eighty five thousand dollars and their equipment depreciation was a hundred and forty eight thousand dollars um for whatever reason maybe they got rid of a piece of equipment or something like this so the overall cost actually let's make it 145 so it's an even number here uh uh let's see five and five is ten three zero five hundred and thirty thousand dollars so their overall cost for 530 and the the thing that happened to my friend was kind of a shame the boss came in and gave him a hard time they said look at these variances you were off 250 to 275 you blew the budget by 25 000 25 000 unfavorable you blew your budget here by 10 000. unfavorable the only place well this is 35 unfavorable the only place you made your budget was the place you didn't have a lot of control over depreciation you were 5 000 favorable but overall you are 30 000 to the bad you did a bad job here friend uh what do you have to say for yourself and i hope you're looking at this and saying yeah he did go over budget but this is not justice And the reason is they were open so many more days. We would expect them to go over budget. And what we should do is not compare them to their static plan, their plan of 250 days.
We should say, okay, let's pretend, let's go back in time. Let's give ourselves a time machine. If we could redo the budget as a flexible budget, what would we say? If I could go back in time and tell my previous self, hey self.
let's make a flexible budget as if we knew that we would be open 300 days what would i budget for and the truth is i wouldn't budget for 250 or 100 in wages or supplies they're variable costs they vary with the amount of days open and the amount of days worked so i gotta make a new budget based on this flexible data and Let's see what we do. So I ignore the actuals. I don't even look at the actuals.
I just pretend I didn't know that. And I make a new budget based on 300 days. So my wages were $250,000 based on 250 days.
Well, what would they be based on 300 days? They'd be $300,000 a day. My wages would be $300,000.
My supplies, $100,000 based on 250 days. What would that be? I got to open a calculator to figure out what that would be. be i have no idea if it was a hundred not one nine nine oh my goodness my Calculator is getting away from me. $100,000 based on 250 days.
That's $400 a day. Well, $400 a day for 300 days is $120,000. 300 plus 120 is 420. Now, again, before the year, I didn't know I sold this equipment.
So I would have just budgeted depreciation to be 150. And if knowing what I know now. i would have given my friend a 670 000 budget line so let's compare that flexible budget to the actual to get a flexible variance 300 versus 275 25 000 favorable right he had to he spent 275 given what we know we would have expected him to spend 300 110 versus 120 this is 10 000 favorable so we end up at 35 000 favorable now it's it's interesting this matches the unfavorable number it doesn't have to in fact it won't in any examples we do this chapter just a strange coincidence that this random example i came up with uh came up with the same number but that's a weird thing um 150 for a flexible versus 145 for actual again we our depreciation cost was lower so this is still 5 000 favorable so overall We would have expected, maybe my math is bad here, I said $670,000. We would have expected to spend $570,000.
We spent $530,000. We are $40,000 to the good. This is a favorable variance.
So my friend, armed with the knowledge of flexible budgets, I think they have a leg to stand on. I think if the boss is giving them a hard time about blowing the budget, I think I can say, look, we're open 50 more days. It should have cost us $50,000 more in wages and $20,000 more in supplies.
I actually did a good job controlling costs. And the flexible budget gives you that ammunition for that type of conversation. But it also just gives you ammunition to understand how a company performed.
Again, budgeting is useful. It's a planning tool. But when we look back, there may be value in flexing our budget, making a flexible budget.
And that's what this module is all about. that's all for this video see you in the next one bye for now