9 14: Flexible Budget Reports and Multiple Cost Drivers Business LibreTexts

Static budgets are used by accountants, finance professionals, and the management teams of companies looking to gauge the financial performance Flexible Budget Report of a company over time. July of 20X9 was hotter than usual, and Mooster found itself actually producing 105,000 gallons.

The flexible budget is a budget that changes as per the activity level or production of units. A flexible budget flexes the static budget for each anticipated level of production.

Why is the flexible budget a better way to measure performance than the static budget?

But, then we also need to look at how many classes are taught and how that may affect wages and other costs. Those kinds of expenses are fixed, so it doesn’t matter how many shoes we sell or classes are taken, they remain the same. This type of budgeting helps us to see how increases in revenue affect net profit. Flexible, rolling budgets empower entrepreneurs to cope with change. This nimble planning process lets you adjust spending throughout the year; benefits include less overspending, more opportunities and speedier responses to changing market and business conditions. Flexible reporting changes the way that you can create and use your ad hoc reports. When using a static budget, a company or organization can track where the money is being spent, how much revenue is coming in, and help stay on track with its financial goals.

Be sure to notate whether or not the result is negative or positive, as this will inform if it’s an unfavorable or favorable variance. The flexible budget responds to changes in activity, and may provide a better tool for performance evaluation. Fixed factory overhead is the same no matter the activity level, and variable costs are a direct function of observed activity. While variances are noted in static budgets, a flexible budget allows you to enter the revenues and expenses relevant to that particular budget period, adapting flexible costs using real-time data. A flexible budget can be a useful resource for business owners struggling to properly budget around variable costs.

14: Flexible Budget Reports and Multiple Cost Drivers

The static budget is intended to be fixed and unchanging for the duration of the period, regardless of fluctuations that may affect outcomes. When using a static budget, some managers use it as a target for expenses, costs, and revenue while others use a static budget to forecast the company’s numbers.

Static budgeting is constrained by the ability of an organization to accurately forecast its needed expenses, how much to allocate to those costs and its operating revenue for the upcoming period. Keep in mind that if you or your bookkeeper are unfamiliar with cost accounting, the process of creating a flexible budget is best left in the hands of an accounting professional or CPA. While preparing any budget at all is always better than not having one, a static budget does not prepare you for revenue and expense changes in real time. Changing costs in the manufacturing process can severely impact your profit margin. Any unexpected market shifts may find a material essential to your production line suddenly costing more than three times the original budgeted amount. Creating a business budget, particularly a flexible budget, requires some familiarity with the accounting process and is best left to experienced accountants and bookkeepers with knowledge of cost accounting. It allows the identification of its generating factors so that managers can act on the controllable elements that influence the achievement of this priority objective (Aslău, 2001).

Flexible Budget Performance Report Template ( – PROFESSIONAL TEMPLATES

And adverse or negative variance means the organization was not able to achieve its target plans. Because the budget can be made for any activity, the variance also needs to be analyzed separately for each activity.

• When preparing budget reports, it is important to include in the report the items the manager can control.
• While this tool is useful for performance evaluation, it does little to aid advance planning.
• Common errors in comparing actual costs to budgeted costs are to assume all costs are fixed or to assume all costs are variable.
• A deficiency with the static budget is the lack of flexibility to adjust to unexpected changes.
• The new budget for sales commissions is $10,500 ($262,500 sales times 4%), and the new budget for delivery expense is $1,750 (17,500 units times 10%).

Performance areas that operate better than originally estimated are marked with an F forfavorable variance. Instead of estimating production levels, use the actuals from the previous month to create your flexible budget. For instance, if your company produced 50,000 units in January, and you want to budget for 75,000 units in February, you have to look at your variable costs. The flexible budget-based performance evaluation is a remedy for this phenomenon. Office Plus sells its main product, ergonomic mouse pads, for $13 each. Prepare a monthly flexible budget for the product, showing sales revenue, variable costs, fixed costs, and operating income for volume levels of 45,000, 55,000, and 75,000 pads. Fixed overhead costs are capacity costs acquired in advance of usage.

Separate fixed and variable costs

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If a manager is only responsible for a department’s costs, to include all the manufacturing costs or net income for the company would not result in a fair evaluation of the manager’s performance. If, however, the manager is the Chief Executive Officer, the entire income statement should be used in evaluating performance.

A budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. While accounting software is an important part of tracking all of your financial transactions, many software applications simply don’t have the capability of preparing a flexible budget. Expenses such as rent, management salaries, and marketing costs remain static and do not change based on production. If your expenses aren’t directly related to revenue, this budget model probably won’t work for you. A flexible budget gives you wiggle room for the unexpected and unknown.

That is, how well did the manager control costs for the actual level of production? To measure whether or not a manager accomplishes his or her goals, the static budget is used. The static budget represents certain goals that the firm wants to achieve. A manager is effective if the goals described by the static budget are achieved or exceeded. A flexible budgeting approach is more realistic and practical than a static budget.