University:
Baltimore City Community College
Course:
ACT 221 | Principles of Financial Accounting I
Academic year:

2024
Views:

137

Pages:

3
Author:

Danny A.

Analyzing Results Managers generally have a cycle of planning and control; this cycle of planning and control is illustrated in Exhibit. As indicated earlier, the comparison of a static budget with actual results will not explain variances because the actual level of sales achieved may differ from the level used to prepare the budget. A flexible budget that is based on the actual level of sales achieved assists in analyzing variances from planned results. Variances from planned results occur because of two factors: Sales volume variance-Differences in revenues and expenses between the amounts contained in the flexible budget for the actual units sold and the amounts contained in the static budget. Flexible budget variance-Differences in revenues and expenses between the amounts for the actual results achieved and the amounts contained in the flexible budget. The purpose of analyzing budget variances is to identify the causes of differences between expectations and actual experience. With this knowledge management evaluates the causes and makes decisions such as the need for adjusting their plans, rewarding outstanding personnel performance, criticizing or reassigning poor performers, and so on. Exhibit 17-5 presents a performance report for the Bellow Corporation based on the flexible budget for an activity level of 20,000 unit sales. In this exhibit Column A presents the actual results for the year, Column B presents the flexible budget for the actual volume of 20,000 unit sales achieved, Column C presents the static master budget, Column D presents the flexible budget variances (Column A – Column B), and Column E presents the sales volume variance (Column B Column C). The data in Exhibit 17-5 indicate that actual net income ($40,000) was $20,000 less than the master budget net income ($60,000). This difference includes a flexible budget variance of $0 (Column D) and an unfavorable sales volume variance of $20,000 (Column E). Additional analysis of Exhibit 17-5 reveals that the budgeted unit sales price was $20 but the actual sales price averaged $21 ($420,000 sales revenue/ 20,000 units sold). Consequently, even though the flexible budget net income was achieved, both the sales and variable expenses budgetary control functions had deviations from standards. The increase in the unit sales price was offset by an increase in the variable cost per unit. That is, the budgeted variable expense per unit was $15; however, Bellow Corporation's actual average variable expense unit cost was $16 ($320,000 variable expenses/20,000 units sold).