Flexible Budgeting Flashcards
Why do we do flexible budgeting?
if the volume of sales/production is greater than originally budgeted, there is no point comparing it to the original one
What is a fixed budget?
Budget set prior to the control period and subsequently not changed in response to changes in activity, costs or revenue (can serve as performance evaluation)
What is Budget flexing?
involves flexing variable costs from original budgeted levels to allow for changes in volume while keeping fixed costs the same
What method can be useful for flexing?
High-low method as splits up fixed and variable costs
Whats the first thing you have to do before flexing the budget?
establish which are the fixed and which are the variable costs
How do you calculate a flexed budget?
- find out the cost per unit (divide sales by the cost for each of the categories of labour, materials, production overheads, admin overheads etc)
- establish what types of costs they are (variable or fixed for each category)
What should you do if the cost is semi- variable? how do you know it is?
If when production increases the cost goes down
Use the High-Low method (to find VC and FC)
How do you reconcile the budgets?
Compare flexed to the actual!
Adverse if flexed shows lower figure than actual, favourable if flexed is higher figure than actual
What key characteristics of the budget system are necessary for motivation?
Participation- staff should feel involved
Controllability- managers must only be judged on what they can influence
Achievability-unrealistic budgets/targets will be de-motivational
Clarity- no doubt on what the performance measure is
What is the volume variance?
The difference between fixed budget cost of production of goods and the flexed cost of production of goods
In a fixed vs flexed budget- how do you calculate variable cost per unit?
Fixed minus Flexed budget divided by fixed minus flexed units
What is expenditure variance?
Difference between flexed and actual results
