1.What type of analysis does a flexible budget performance report help managementperform?
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2.What is a price variance? What is a quantity variance?
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3.What are the relations among standard costs, flexible budgets, variance analysis, andmanagement by exception?
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Chapter 10
Flexible Budgets and Overhead Analysis
Using Budget for Performance Evaluation
Budgets are useful for both planning and control, where they are used as benchmarks for
performance evaluation. Determining how budgeted amounts should be compared with
actual results is a major consideration that must be addressed.
Static Budgets versus Flexible Budgets
A performance report compares actual costs with budgeted costs. There are two ways to
make this comparison:
Compare actual costs with the budgeted costs for the budgeted level of activity.
Compare actual costs with the actual level of activity
The first choice is a report based on
static budgets
, whereas the second choice is for a
report based on
flexible budgets
.
Static Budgets and Performance Reports
A static budget is a budget created in advance that is based on a particular level of
activity. Master budgets are generally created for a particular level of activity. Thus, one
way to prepare a performance report is to compare the actual costs with the budgeted
costs from the master budget.
Example 1:
ETHICAL DECISIONS:
Companies that use static budgets as the benchmark for
performance evaluation invite potential abuse by managers. Although unethical, a