8.1 Static vs. Flexible Budgets

Budgets are crucial for planning and control in cost accounting. Static budgets set fixed plans, while flexible budgets adjust for actual output. Flexible budgets offer better cost predictions, performance evaluation, and decision support, allowing for more accurate cost comparisons and improved resource allocation.

Variance analysis digs deeper into budget differences. It examines sales and variable cost variances, breaking them down into price and volume components. This analysis helps managers understand the reasons behind budget deviations and identify areas for improvement in pricing, efficiency, and sales volume.

Budget Types and Analysis

Define static and flexible budgets

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  5.1 Cost Behavior Vs. Cost Estimation | Principles of Accounting II View original

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  6.3 Comparing Absorption and Variable Costing | Managerial Accounting View original

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• Static budget establishes fixed plan based on one activity level remains unchanged regardless of actual output used for planning and performance evaluation
• Flexible budget adjusts based on actual output levels accounts for variable costs changing with activity provides more accurate cost comparisons

Explain the purpose and benefits of flexible budgets

• Purposes of flexible budgets provide more accurate cost predictions facilitate performance evaluation support decision-making for various scenarios (expansion, contraction)
• Benefits include better cost control more meaningful variance analysis improved planning for various activity levels enhanced resource allocation

Calculate flexible budget variances

• Steps to calculate flexible budget variances:
  1. Determine actual output level
  2. Adjust budgeted costs for actual output
  3. Compare adjusted budget to actual costs
• Flexible budget variance formula $Flexible [Budget Variance](https://www.fiveableKeyTerm:budget_variance) = Actual Costs - Flexible Budget Costs$ helps identify cost discrepancies

Distinguish between a static budget variance and a flexible budget variance

• Static budget variance compares actual results to original static budget includes both volume and price/efficiency differences useful for overall performance evaluation
• Flexible budget variance compares actual results to flexible budget at actual output isolates price and efficiency differences eliminates impact of volume differences provides more accurate cost control insights

Prepare a flexible budget performance report

• Components of a flexible budget performance report include actual results column flexible budget column variance column highlights deviations from expected costs
• Calculation steps involve determining actual output level adjusting budgeted amounts for actual output calculating variances between actual and flexible budget identifies areas for improvement

Variance Analysis

Compute and interpret sales and variable cost variances

• Sales variance calculations:
  • Price variance: $(Actual Price - Budgeted Price) × Actual Quantity$ measures impact of price changes
  • Volume variance: $(Actual Quantity - Budgeted Quantity) × Budgeted Price$ measures impact of quantity changes
• Variable cost variances calculations:
  • Price variance: $(Actual Price - Standard Price) × Actual Quantity$ measures impact of input price changes
  • Efficiency variance: $(Actual Quantity - Standard Quantity) × Standard Price$ measures impact of input quantity changes

Explain the relationship between static budget, flexible budget, and sales volume variances

• Static budget variance equals sum of flexible budget variance and sales volume variance provides overall performance measure
• Flexible budget variance represents difference between actual results and flexible budget isolates price and efficiency impacts
• Sales volume variance shows difference between flexible budget and static budget represents impact of changes in sales volume on profits helps assess market performance