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1、PowerPoint Authors:Susan Coomer Galbreath,Ph.D.,CPACharles W.Caldwell,D.B.A.,CMAJon A.Booker,Ph.D.,CPA,CIACynthia J.Rooney,Ph.D.,CPACopyright 2014 by The McGraw-Hill Companies,Inc.All rights reserved.Flexible Budgets andPerformance AnalysisChapter 1010-2Learning Objective 10-1Prepare a flexible budg
2、et.10-3Characteristics of Flexible Budgets Planning budgetsare prepared fora single,plannedlevel of activity.Performance evaluation is difficult when actual activity differs from the planned level of activity.Hmm!Comparingstatic planning budgets with actual costsis like comparingapples and oranges.1
3、0-4Improve performance evaluation.May be prepared for any activity level in the relevant range.Show costs that should have beenincurred at the actual level ofactivity,enabling“apples to apples”cost comparisons.Help managers control costs.Lets look at Larrys Lawn Service.Characteristics of Flexible B
4、udgets10-5Larrys Lawn Service provides lawn care in a planned community where all lawns are approximately the same size.At the end of May,Larry prepared his June budget based onmowing 500 lawns.Since all of the lawns are similar in size,Larry felt that the number of lawns mowed in a month wouldbe th
5、e best way to measure overall activity for his business.Larrys Budget Deficiencies of the Static Planning Budget10-6Deficiencies of the Static Planning BudgetLarrys Planning Budget10-7Deficiencies of the Static Planning BudgetLarrys Actual Results10-8Deficiencies of the Static Planning BudgetLarrys
6、Actual Results Compared with the Planning Budget10-9Deficiencies of the Static Planning BudgetLarrys Actual Results Compared with the Planning BudgetF=Favorable variance that occurs when actual costs are less than budgeted costs.U=Unfavorable variance that occurs when actual costs are greater than b
7、udgeted costs.F=Favorable variance that occurs when actual revenue is greater than budgeted revenue.10-10Deficiencies of the Static Planning BudgetLarrys Actual Results Compared with the Planning BudgetSince these variances are unfavorable,has Larry done a poor job controlling costs?Since these vari
8、ances are favorable,has Larry done a good job controlling costs?10-11I dont think Ican answer thequestions usinga static budget.Actual activity is above planned activity.So,shouldnt the variablecosts be higher if actualactivity is higher?Deficiencies of the Static Planning Budget10-12The relevant qu
9、estion is.“How much of the cost variances are due to higher activity and how much are due to cost control?”To answer the question,we mustthe budget to theactual level of activity.Deficiencies of the Static Planning Budget10-13How a Flexible Budget Works To a budget,we need to know that:Total variabl
10、e costs changein direct proportion to changes in activity.Total fixed costs remainunchanged within therelevant range.FixedVariable10-14Lets prepare a budgetfor Larrys Lawn Service.How a Flexible Budget Works10-15Preparing a Flexible BudgetLarrys Flexible Budget10-16Quick Check What should the total
11、wages and salaries cost be in a flexible budget for 600 lawns?a.$18,000.b.$20,000.c.$23,000.d.$25,000.10-17Learning Objective 10-2Prepare a report showing activity variances.10-18Activity VariancesPlanning budget revenues and expensesFlexible budget revenuesand expensesThe differences between the bu
12、dget amounts are called activity variances.10-19Lets use budgetingconcepts to compute activity variances for Larrys Lawn Service.Activity Variances10-20Activity VariancesLarrys Flexible Budget Compared with the Planning Budget10-21Larrys Flexible Budget Compared with the Planning BudgetActivity Vari
13、ancesActivity and revenue increase by 10 percent,but net operating income increases by more than 10 percent due to the presence of fixed costs.10-22Learning Objective 10-3Prepare a report showing revenue and spending variances.10-23Revenue and Spending VariancesFlexible budget revenueActual revenueT
14、he difference is a revenue variance.The difference is a revenue variance.Flexible budget costActual costThe difference is a spending variance.The difference is a spending variance.10-24Revenue and Spending VariancesLets use budgetingconcepts to compute revenue and spending variances for Larrys Lawn
15、Service.10-25Revenue and Spending VariancesLarrys Flexible Budget Compared with the Actual Results$1,750 favorable$1,750 favorablerevenue variancerevenue variance10-26Larrys Flexible Budget Compared with the Actual ResultsRevenue and Spending VariancesSpending variances10-27Learning Objective 10-4Pr
16、epare a performance report that combines activity variances and revenue and spending variances.10-28Now,lets use budgetingconcepts to combine the revenue and spending variances reports for Larrys Lawn Service.A Performance Report Combining Activity and Revenue and Spending Variances10-29A Performanc
17、e Report Combining Activity and Revenue and Spending Variances10-30A Performance Report Combining Activity and Revenue and Spending Variances50 lawns$75 per lawn50 lawns$30 per lawn10-31$43,000 actual-$41,250 budgetA Performance Report Combining Activity and Revenue and Spending Variances10-32Perfor
18、mance Reports in Non-Profit OrganizationsNon-profit organizations may receive funding from sources other than the sale of goods and services,so revenues may consist of both fixed and variable elements.UniversitiesTuition and feesDonationsState fundingEndowments10-33Performance Reports in Cost Center
19、sPerformance reports are often prepared for cost centers.These reports should be prepared using the same principles discussed so far,except for the fact that these reports will not contain revenue or net operating income variances.10-34Learning Objective 10-5Prepare a flexible budget with more than
20、one cost driver.10-35More than one cost driver may be needed toadequately explain all ofthe costs in an organization.The cost formulas usedto prepare a flexiblebudget can be adjustedto recognize multiplecost drivers.Flexible Budgets with Multiple Cost Drivers10-36Because of the large unfavorable wag
21、es and salaries spendingvariance,Larry decided to add an additional cost driver for wages and salaries.The variance is due primarily to the number of hours required for the additional edging and trimming.So Larry estimates the additional hours and builds those hours into both his revenue and expense
22、 budget formulas.Larrys New Budget Flexible Budgets with Multiple Cost Drivers10-37Flexible Budgets with Multiple Cost DriversLarrys Budget Based on More than One Cost Driver10-38Learning Objective 10-6Understand common errors made in preparing performance reports based on budgets and actual results
23、.10-39Some Common ErrorsThe most common errors when preparing performance reports are to implicitly assume that:1.All costs are fixed,or that;2.All costs are variable.Assume all costs are fixed.10-40Common Error 1:Assuming All Costs Are FixedFaulty Analysis Comparing Budgeted Amounts to Actual Amounts10-41Common Error 2:Assuming All Costs Are VariableFaulty Analysis that Assumes All Budget Items Are Variable10-42End of Chapter 10