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

2024
Views:

407

Pages:

2
Author:

Danny A.

Flexible Budgeting The budget discussed in Chapter 16 was a static budget that was prepared for a single level of activity. Static budget amounts are used for planning purposes to determine unit costs and overhead application rates. Managers attempting to achieve budgetary control often use performance reports that are based on flexible budgets. A flexible budget is a set of budgets that covers a range of activity levels rather than a single level. Budgetary control is accomplished through the use of a performance report that compares actual results to budgeted results. For example, the Bellow Corporation's performance report for January 1992 is illustrated in Exhibit. A variance is the difference between an actual and a budgeted amount. Variances are identified as favorable (F) or unfavorable (U). The performance report in Exhibit is difficult to interpret because the master budget was based on expected sales of 24,000 units, whereas actual sales totaled 20,000 units. For this reason performance reports should be based on flexible budgets that consider cost behavior patterns at different levels of activity. A flexible budget for the Bellow Corporation for January 1992 at three activity levels is presented in Exhibit. The flexible budget is prepared as follows: A budget formula can be prepared from this information for the Bellow Corporation's total expenses at any activity level as follows: $15 × unit sales (variable) + $60,000 (fixed). The total budgeted cost for a company can also be shown graphically. A graph allows a company to review quickly a budget for any level of activity within the relevant range of production. In a graph the unit activity level is shown on the horizontal axis and costs are shown on the vertical axis. Exhibit 17-3 is a graph of the total budgeted costs for the Bellow Corporation at the three activity levels of 20,000, 24,000, and 28,000 units of sales contained in the flexible budget. Notice that the total cost volume line meets the vertical axis at $60,000 the amount of the fixed costs.