Flexible budget and variance analysis

Question 1

Fixed (Static) and flexible budgets

• The _________ __________ ____________ prior to the financial year is said to be the ________ __________, “________” in the sense: (2)

Answer 1

• The master budget prepared prior to the financial year is said to be the fixed budget, “fixed” in the sense:

1. No plans are made for differing levels of production or sales beforehand
2. When actual results are known, no changes are made to the fixed budget (in retrospect) to represent new targets to be achieved for the new level of activity

Question 2

Flexible Budgeting

What is it?
What principles does it use and what does that mean?

What are they used for and an example

Answer 2

A budget which, by recognising different cost behaviour patterns, is designed to change as volume of output changes.

Flexible budgeting uses the the principles of marginal costing.
i.e. a knowledge of cost behaviour patterns is necessary

In planning, flexible budgets may be used to support the fixed budget, as a contingency. Say, a business hopes to achieve a sales level of 6 000 units, flexible budgets may also be prepared fo—r 5 000 units and 4 000 units.

Question 3

Flexible budgets in planning

Example

Answer 3

Question 4

Using flexible budgets..

Retrospectively, flexible budgets may be used at the end of the ___________ _________ in order to __________ what the _________ should have been ________ the _________________.

Answer 4

Retrospectively, flexible budgets may be used at the end of the control period in order to establish what the results should have been under the circumstances.

Question 5

Flexible budgets and budgetary control

What does management need to know…?
Businesses are…?
To gain useful…?

Answer 5

1. Management needs to know if performance has been good or bad, a flexible budget provides a yardstick for comparison.
2. Businesses are dynamic, it’s unlikely that actual trading is going to be the same as the fixed budget, comparing actual results with the fixed budget will probably be misleading.
3. To gain useful control information, it is necessary to “flex” the fixed budget to the level of activity actually achieved and compare this to the actual results.

Question 6

Flexible budgets in control..

A firm plans to operate at 10 000 units for a control period and has costs as follows labour £5, material £8, and packaging £1.
If the firm actually operated at 15 000 units during the control period with costs as follows, labour £85 000, materials £110 000 and packaging £16 000, assess the performance.
fixed vs actual

Answer 6

Question 7

Flexible budgets and budgetary control…

What is budgetary control?
How is control exercised?
By analysing…?

Answer 7

Budgetary control is the practice of establishing budgets, for which individual managers will have responsibility. Control is exercised via comparing actual results with expected results; the differences between the two are referred to as “variances”. By analysing variances these form a basis for performance evaluation.

Question 8

Flexible budgets in control..

A firm plans to operate at 10 000 units for a control period and has costs as follows labour £5, material £8, and packaging £1.
If the firm actually operated at 15 000 units during the control period with costs as follows, labour £85 000, materials £110 000 and packaging £16 000, assess the performance.
fixed vs flexed

Answer 8

By comparing like with like, flexed 15 000 units and actual 15 000 units:
Labour, the overspend is £10 000 and not £35 000
Materials, there is a saving of £10 000 and not an overspend of £30 000 !!
Packaging, the overspend is only £1 000 and not £6 000

Question 9

Flexible budgets in control….

With an increase in activity, it is expected that costs should rise, the question is by _____ _________
The comparison of the fixed budget with the actual results, only shows what is _________, there has been an _________ in costs, over and above that originally ___________.
To establish whether or not the increase is in _____ with expectations, in terms of control, the __________ _________ needs to be _________ to the level of _________ operations.

Answer 9

With an increase in activity, it is expected that costs should rise, the question is by how much ??
The comparison of the fixed budget with the actual results, only shows what is obvious, there has been an increase in costs, over and above that originally budgeted.
To establish whether or not the increase is in line with expectations, in terms of control, the fixed budget needs to be flexed to the level of actual operations.