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FLEXIBLE BUDGETS
Key Topics to Know
Difference between a flexible budget and a static budget Flexible budget “flexes” due to changes in activity. Prepare a flexible budget that includes revenue and both variable and fixed costs Comparing actual activity to a static/planning or flexible budget and why the flexible budget is better for comparison. Activity variances are the differences between the static/planning budget and the flexible budget and are caused by the difference between planned and actual activity levels. Revenue and spending variances (sometimes called flexible budget variances) are the differences between the flexible budget and the actual results and are caused by differences in the revenue per unit, cost per unit and/or the amount of cost incurred. Revenue and spending variances are calculated based on the actual activity level. Revenue and variable costs will be different in the static/planning budget and the flexible budget because both are affected in total by the level of activity. Fixed costs will be the same in the static/planning budget and the flexible budget because fixed costs are unaffected in total by changes in the activity level. Therefore activity variances for fixed costs are always zero.
Problems
Problem #
Velma Inc. prepared the following budget for the year based on 1,000 units sold: Sales $750, Variable costs 450, Contribution margin 300, Fixed costs 200, Operating income 100,
Actual results for the year were: Units sold 950 Sales $703, Variable costs 432, Contribution margin 270, Fixed costs 185, Operating income 85,
Required: a) Prepare a flexible budget for the year. b) Calculate the activity and revenue and spending variances. c) Prepare a budgeted income statement for next year with 1, units sold and a 10% increase in fixed costs.
Problem #
Bruess Clinic uses patient-visits as its measure of activity. During July, the clinic budgeted for 2,700 patient-visits, but its actual level of activity was 3,200 patient-visits. The clinic uses the following revenue and cost formulas in its budgeting, where q is the number of patient-visits:
Revenue $49.60q Personnel expenses $31,200 + $15.10q Medical expenses $700 + $9.60q Occupancy expenses $10,000 + $2.00q Administrative expenses $7,000 + $0.20q
Multiple Choice Questions
1. Papenfuss^ Family Inn is a bed and breakfast establishment in a converted 100-
year-old mansion. The Inn's guests appreciate its gourmet breakfasts and individually decorated rooms. The Inn's overhead budget for the most recent month appears below:
Activity level 86 guests Variable overhead costs: Supplies $86. Laundry 507. Fixed overhead costs: Utilities 340. Salaries and wages 4,790. Depreciation 2,620. Total overhead cost $8,343.
The Inn's variable overhead costs are driven by the number of guests. What would be the total budgeted overhead cost for a month if the activity level is 76 guests? a) $52,848. b) $8,343. c) $8,274. d) $7,373.
2. Pettry^ Snow Removal's cost formula for its vehicle operating cost is $2,170 per
month plus $408 per snow-day. For the month of December, the company planned for activity of 16 snow-days, but the actual level of activity was 13 snow-days. The actual vehicle operating cost for the month was $7,600. The vehicle operating cost in the planning budget for December would be: a) $7, b) $9, c) $8, d) $7,
3. Nicolaysen^ Corporation manufactures and sells a single product. The company
uses units as the measure of activity in its budgets and performance reports. During February, the company budgeted for 5,700 units, but its actual level of activity was 5,690 units. The company has provided the following data concerning the formulas used in its budgeting and its actual results for February: Budgeted data Fixed element per month
Variable element per unit Revenue - $36. Direct labor $0 $3. Direct materials 0 17. Manufacturing overhead
Selling and administrative expenses 26,800^ 0. Total expenses $57,300 $23.
Actual results Revenue $207, Direct labor $21, Direct materials $104, Manufacturing overhead $37, Selling and administrative expenses $29,
The selling and administrative expenses in the budget for February would be: a) $29, b) $28, c) $29, d) $28,
4. Paradiso^ Medical Clinic measures its activity in terms of patient-visits. Last
month, the budgeted level of activity was 1,060 patient-visits and the actual level of activity was 1,050 patient-visits. The cost formula for administrative expenses is $3.00 per patient-visit plus $17,000 per month. The actual administrative expense was $19,300. In the clinic's performance report for last month, the spending variance for administrative expenses was: a) $850 favorable b) $220 unfavorable c) $30 favorable d) $880 favorable
Solutions to Problems
Problem #
Actual
Revenue and Spending Variances
Flexible Budget
Activity Variances
Planning Budget 950 0 950 (50) 1, Sales $703,000 ($9,500) 712,500 ($37,500) $750, Variable costs 432,250 (4,750) 427,500 22,500 450, Contribution margin 270,750 (14,250) 285,000 (15,000) 300, Fixed costs 185,000 15,000 200,000 0 200, Operating income 85,750 75 85,000 (15,000) 100,
Revenue and Cost Formula Variable Fixed
Planning Budget 1, Sales $750 $825, Variable costs 450 495, Contribution margin 300 330, Fixed costs $220,000 220, Operating Income $110,
Problem #
Performance Report Part 1
Actual
Revenue and Spending Variances
Flexible Budget Patient visits 3,200 3,
Revenue $49.60q $165,680 $6,960 F^ $158, Expenses: Personnel expenses $31,200 + $15.10q 76,190 3,330 F^ 79, Medical expenses $700 + $9.60q 31,790 370 U^ 31, Occupancy expenses $10,000 + $2.00q 15,960 440 F^ 16, Administrative expenses $7,000 + $0.20q 7,600 40 F^ 7, Total expenses 131,540 3,440 F^ 134, Operating income $34,140 $10,400 F^ $23,
Performance Report Part 2 Flexible Budget
Activity Variances
Planning Budget Patient visits 3,200 2,
Revenue $49.60q $158,720^ $24,800 F^ $133, Expenses: Personnel expenses $31,200 + $15.10q 79,520^ 7,550 U^ 71, Medical expenses $700 + $9.60q 31,420^ 4,800 U^ 26, Occupancy expenses $10,000 + $2.00q 16,400^ 1,000 U^ 15, Administrative expenses $7,000 + $0.20q 7,640^ 100 U^ 7, Total expenses 134,980^ 13,450 U^ 121, Operating income $23,740^ $11,350 F^ $12,
Solutions to Multiple Choice Questions
1. C
2. C
3. D
4. A
5. C
6. D
