CHAPTER 2:

Flexible
Managerial accounting 2

budget and
performance
analysis
Group 1

Nguyen Ngoc Mai Nguyen

Do Tran Boi Ngoc
Hoang Nhu Thao
Huynh Ngoc Ha
Lecturer: Mr. Phung Quoc Viet
CHAPTER 2:
2.1. Flexible budget

Flexible 2.2. Flexible budget variances

budget
and 2.3. Flexible budgets with multiple cost drivers

performance
analysis 2.4. Some common errors

Managerial accounting 2 Group 1

 MANAGERIAL ACOUNTING 2
Chapter 2:Flexible budgets and Performance analysis
2.1

BUDGET
FLEXIBLE

STATIC PLANNING BUDGET

is prepared before the period begins, valid for the
planned level of activity

the amounts will not change even with significant changes

in volume

is difficult to evaluate performance

(when actual activity differs from the planned level of
activity)
planning budget actual results
Actual Budgeted
Comparison of planning budget to actual results:
not suitable to evaluate how budget is controlled

Prepare flexible budget

CHARACTERISTICS
OF
FLEXIBLE
BUDGETS
FLEXIBLE BUDGET

may be prepared for any activity level in the

relevant range

show costs that should have been incurred at the

actual level of activity

help managers control costs

improve performance evaluation

How a flexible budget works?
Actual results Flexible budget
help managers control costs
 2.2 Flexible Budget Variances
MANAGERIAL ACOUNTING 2

Chapter 2:Flexible budgets and

Performance analysis

Group 1
 Flexible Budget Variances

Revenue
Activity &
Variances Spending
Variances
 Planning
budget
revenue &
cost

Activity The

Variances difference

Flexible
budget
revenue &
cost
 Planning budget

Standard Quantity
x
Standard Price
Activity
Variances
Flexible budget

Actual Quantity
x
Standard Price
Because the salon had 100 more
client-visits (higher activity)

-> Actual revenue should have

been higher than Budgeted
revenue by $18,000.

-> $18,000 F (FAVORBLE)

Because the salon had 100 more client-visits
(higher activity)

-> Actual electricity costs should have been

higher than Budgeted costs by $10.
-> $10 U (UNFAVORBLE)
Because the salon had 100 more
client-visits (higher activity)

-> Actual net operating income

should have been higher than
Budgeted net operating income by
$13,710.

-> $13,710 F (FAVORBLE)

 Actual
revenue &
cost
Revenue
& The

difference
Spending
Variances Flexible
budget
revenue &
cost
 Actual results

Actual Quantity Revenue

x Variances
Actual Price

Flexible budget Spending

Variances
Actual Quantity
x
Standard Price
 Revenue Spending
Variances Variances

Actual Revenue > Revenue Actual Cost > Cost should

should have been have been
-> Favorble -> Unfavorble

Actual Revenue < Revenue Actual Cost < Cost should

should have been have been
-> Unfavorble -> Favorble
Actual revenue > The revenue
should have been

-> $3,800 U (UNFAVORBLE)

Actual cost < The cost should
have been

-> $60 F (FAVORBLE)

 Actual net operating income
<
The net operating income
should have been

-> $9,280 U (UNFAVORBLE)

 A performance Report
Combining Activity and
Revenue and Spending
Variances
Flexible Budget Variance = $4,430 F
 Flexible
Budget
Variance
= $4,430 F

The difference between the budgeted amount and

the actual results is composed of two different
variances - Activity variances & Revenue and
Spending variances
Performance Reports in
Nonprofit Organization
The revenue in
governmental and
non-profit
organizations
consist of both
fixed and variable
elements
 Performance Reports in
Cost Centers
Be often prepared for organizations that do
not have any source of outside revenue

Cost
Centers
CHAPTER 2:
Flexible budget and performance analysis

2.3. Flexible

Managerial accounting 2
budgets with
multiple cost
drivers

Group 1
 2.3. Flexible budgets with multiple cost drivers

2.3.
Flexibl
e More than one cost driver
budge may be needed to adequately
ts explain all of the costs in an
with
organization.
multi
ple
cost
driver
s

The cost formulas used to

prepare a flexible budget can
be adjusted to recognize
multiple cost drivers.

Rick’s
Hairstyling
 Rick’s Hairstyling
2.3. Flexible budgets with multiple cost drivers

Depend more on the number of hours that the salon is

open for business than the number of client-visits.

The cost formula for wages and salaries would be more

accurate if it were stated in terms of the hours of
operation rather than the number of client-visits.

EXAMPLE
Our
The cost of electricity is even The cost is fixed

Clients
more complex.

Some of the cost depends on

The cost depends on the
the number of hours the salon
number of client-visits
is open
2.3. Flexible budgets with multiple cost drivers
Virtual Styling
Presentations are
communication tools that
can be lectures.
A flexible budget
in which these changes
have been made
Two cost drivers are listed
client-visits— q1
hours of operation— q2
Fast Delivery
Presentations are
communication tools that
can be lectures.
The difference
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.
 E X H I B I T 9–5
2.3. Flexible budgets with multiple cost drivers

Activity Variances from Comparing the

Planning Budget to the Flexible Budget
Based on Actual Activity

E X H I B I T 9–6


Revenue and Spending Variances from
Comparing the Flexible Budget to the
Actual Results

E X H I B I T 9–7
Performance Report Combining Activity
Variances with Revenue and Spending
Variances
CHAPTER 2:
Flexible budget and performance analysis

2.3. Flexible budgets

with multiple cost
drivers

The revised flexible budget

based on both client-visit and
hours of operation can be exactly
used in performance valuation

The cosformulas based on more

than one cost driver are more
accurate -> More accurate
variance

Managerial accounting 2
Group 1
CHAPTER 2: FLEXIBLE BUDGET

AND PERFORMANCE ANALYSIS

2.4
SOME COMMON

ERRORS
 When static planning budget costs

are compared to actual costs

FIXED COSTS
without any adjustment for the

actual level of activity

When actual results are compared

to all of the budget items that

VARIABLE

COSTS
have been inflated by the

percentage by which activity

increased (10%).
 SOME COMMON ERRORS
EXHIBIT 9.9
FAULTY ANALYSIS COMPARING BUDGETED AMOUNTS TO ACTUAL AMOUNTS
 SOME COMMON ERRORS
Actual results > Planning Budget
-> $ 120 U (UNFAVORBLE)

EXHIBIT 9.9
FAULTY ANALYSIS COMPARING BUDGETED AMOUNTS TO ACTUAL AMOUNTS
EXHIBIT 9-10
FAULTY ANALYSIS THAT ASSUMES ALL BUDGET ITEMS ARE VARIABLE
The rent is fixed in advance and does not depend
on the volume of business.
-> $31,350 is incorrect
-> The actual rent paid was exactly equal to the
budgeted rent

EXHIBIT 9-10
FAULTY ANALYSIS THAT ASSUMES ALL BUDGET ITEMS ARE VARIABLE
Multiple choice questions

1. The manufacturing overhead variance

that is a measure of capacity
utilization is:

A. The overhead spending variance.

B. The overhead efficiency variance
C. The overhead budget variance.
D. The overhead volume variance.

Multiple choice questions

1. The manufacturing overhead variance

that is a measure of capacity
utilization is:

A. The overhead spending variance.

B. The overhead efficiency variance
C. The overhead budget variance.
D. The overhead volume variance.

Multiple choice questions

2. A volume variance is computed for:

A. Both variable and fixed overhead.

B. Variable overhead only.

C. Fixed overhead only.
D. Direct labor costs as well as overhead

costs.
Multiple choice questions

2. A volume variance is computed for:

A. Both variable and fixed overhead.

B. Variable overhead
only.
C. Fixed overhead only.
D. Direct labor costs as well as overhead

costs.
3. The volume variance is nonzero whenever:

A. Standard hours allowed for the output of a

period differ from the denominator level of
activity.
B. Actual hours differ from the denominator
level of activity.

C. Standard hours allowed for the output of a

period differ from the actual hours during the
period.
D. Actual fixed overhead costs incurred during a
period differ from budgeted fixed overhead
costs as contained in the flexible budget.
3. The volume variance is nonzero whenever:

A. Standard hours allowed for the output of a

period differ from the denominator level of
activity.
B. Actual hours differ from the denominator
level of activity.

C. Standard hours allowed for the output of a

period differ from the actual hours during the
period.
D. Actual fixed overhead costs incurred during a
period differ from budgeted fixed overhead
costs as contained in the flexible budget.
THANK YOU FOR LISTENING
GROUP 1

NGUYEN NGOC MAI NGUYEN

DO TRAN BOI NGOC
HOANG NHU THAO
HUYNH NGOC HA

MANAGERIAL ACCOUNTING 2