MODUL PERKULIAHAN

Flexible Budget

Flexible budget & Variable

overhead variance

Fakultas Program Studi Tatap Muka Kode MK Disusun Oleh

11
Economic & Business Accountancy Kode MK Alfiandri MAcc

Abstract Kompetensi
Diisi dengan abstract Diisi dengan kompetensi
Pembahasan
1. Introduction

Budgeting involves a lot of time and effort and the results of the budgeting process
should not be shoved into a filing cabinet and forgotten. To be useful, budgets should
provide guidance in conducting actual operations and should be part of the performance
evaluation process. However, managers need to be very careful about how budgets are
used. In the government sector, budgets often establish how much will be spent, and
indeed, spending more than was budgeted may be a criminal offense. However, that is
not be applied in the organization. Mostly actual spending will rarely be the same as the
spending that was budgeted at the beginning of the period. This is because the actual level
of activity (such as unit sales) will rarely be the same as the budgeted activity, therefore,
many actual costs and revenues will naturally differ from what was budgeted

2. Characteristic of Flexible Budget

A planning budget is prepared before the period begins and is valid for only the planned
level of activity. A static planning budget is suitable for planning but does not suit for
evaluate to control the costs. If the actual level of activity differs from what was planned,
it would be misleading to compare actual costs to the static, unchanged planning budget.
If activity is higher than expected, variable costs should be higher than expected and
vice versa.

In order to evaluate and control the costs, flexible budget is applied. Flexible budget is an
estimate of what revenues and costs should have been, given the actual level of activity
for the period. When a flexible budget is used in performance evaluation, actual costs
are compared to what the costs should have been for the actual level of activity during
the period rather than to the static planning budget. Flexible budgets take into account
how changes in activity affect costs. This is a very important distinction. If adjustments
for the level of activity are not made, it is very difficult to interpret discrepancies between
budgeted and actual costs.

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3. Deficiencies of the static planning budget

To illustrate the difference between a static planning budget and a flexible budget, it is
better to have the example.

Rick’s Hairstyling, an upscale hairstyling salon located in Beverly Hills that is owned and
managed by Rick Manzi. The salon has very loyal customers. He is currently concerned
to control cost and revenue of his business. He hires a business adviser, Victoria Kho.
He is independent accounting who expert in the small business.

At the end of February, Ricky prepare budget for March, He believes that the number of
customers served in a month is the best way to measure the overall level of activity in his
business salon. Take a note that term of revenue is used for planning budget purposes
not in real sales. Furthermore, he determine the cost into 8 categories e.g., wages and
salaries, hairstyling supplies, client gratuities, electricity, rent, liability insurance,
employee health insurance, and miscellaneous. Client gratuities consist of flowers,
candies, and glasses of champagne that Rick gives to his customers while they are in
the salon

Figure 1 Planning Budget

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 Work altogether with his accountant, Ricky has estimated cost formula for each cost. For
example, cost of electricity. These costs should be $ 1500 + $0.10q where q equal the
number of client visits. In other words, electricity is a mixed cost with a $1,500 fixed
element and a $0.10 per client-visit variable element. Once the budgeted level of activity
was set at 1000 client-visits, it was easy to compute the budgeted amount for each line
item in the budget. The budget for electricity was set at $ 1.600 ($1.500 + $0.10 x 1000).

At the end of the March, Rick found that his actual profit was $ 21.230. It is important to
realize that the actual results are not determined by plugging the actual number of client-
visits into the revenue and cost formulas. The formulas are simply estimates of what the
revenues and costs should be for a given level of activity. What actually happens usually
differs from what is supposed to happen.

Figure 2 – Actual Results – Income Statement

If compare between planning budget with actual results then the results is good because net
operating income increase from $ 16.800 to $ 21.230. However, increase net income that 10%

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cannot be determined by only increase the client visits. It must be something else effect increase
net operating income. In order to analyze it, Ricky then prepares the comparability between
planning budget with actual results.

Figure 3 Comparison of static planning budget to actual results

Note that most of the variances in this report are labeled unfavorable (U) rather than
favorable (F) even though net operating income was actually higher than expected. For
example, wages and salaries show an unfavorable variance of $4,900 because the budget
called for wages and salaries of $102,000, whereas the actual wages and salaries expense
was $106,900. From that information it can be hint that increase the client visit will also
increase the costs. It means increase in activity was good and should be counted as a
favorable variance, but the increase in activity has an apparently negative impact on most of
the costs in the report.

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4. Flexible Budget

Because static planning budget cannot determine what cost should be for actual level of
activity, therefore, flexible budget is used. A flexible budget approach recognizes that a
budget can be adjusted to show what costs should be for the actual level of activity.

Figure 5 – Flexible budget

Based on figure above shows what the revenues and costs should have been given the
actual level of activity in March. The cost formula for each cost is used to estimate what
the cost should have been for 1,100 client-visits—the actual level of activity for March.
For example, using the cost formula $1,500 + $0.10 q, the cost of electricity in March
should have been $1,610 ( = $1,500 + $0.10 × 1,100).

If it sees from flexible budget, net operating income on March should be $ 30.510. But it
stated differently which about $ 21.230, let’s go through in order to find the answer

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To answer the discrepancies between budgeted and actual costs, we have to break down
the variance into two types i.e., Activity Variance and Revenue & Spending Variance.

5. Flexible Budget Variance

Activity Variance

Part of the discrepancy between the budgeted profit and the actual profit is due to the fact
that the actual level of activity in March was higher than expected. In order to answer the
question above, figure below shows the planning budget from the beginning of the period is
compared to the flexible budget based on the actual level of activity for the period.

The planning budget shows what should have happened at the budgeted level of activity
whereas the flexible budget shows what should have happened at the actual level of activity.
Therefore, the differences between the planning budget and the flexible budget show what
should have happened solely because the actual level of activity differed from what had been
expected

Figure 6 – Activity Variance

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 The budget based on 1,000 client-visits shows revenue of $180,000 ($180 per client-visit
× 1,000 client-visits). The flexible budget based on 1,100 client visits shows revenue of
$198,000 ($180 per client-visit × 1,100 client-visits). Because the salon had 100 more client-
visits than anticipated in the budget, actual revenue should have been higher than budgeted
revenue by $18,000 ($198,000 − $180,000). It similar with the budget based on 1,000 client-
visits shows electricity costs of $1,600 (= $1,500 + $0.10 per client-visit × 1,000 client-visits).
The flexible budget based on 1,100 client-visits shows electricity costs of $1,610 (= $1,500 +
$0.10 per client-visit × 1,100 client-visits)

Revenue and Spending Variance

The next question is “What impact did the change in activity have on our revenue, cost and
profit? To answer this question, it must be answered first the question of “how well did we
control our revenue our cost and our profit?

Figure 7 – Revenue and Spending Variance

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Take note that revenue variance is the difference between what the total revenue should
have been, given the actual level of activity for the period, and the actual total revenue. If
actual revenue exceeds what the revenue should have been, the variance is labeled
favorable. If actual revenue is less than what the revenue should have been, the variance is
labeled unfavorable.

On the other hand, spending variance is the difference between how much a cost should
have been, given the actual level of activity, and the actual amount of the cost. If the actual
cost is greater than what the cost should have been, the variance is labeled as unfavorable.
If the actual cost is less than what the cost should have been, the variance is labeled as
favorable

On the revenue part, flexible budget indicates that, given the actual level of activity, revenue
should have been $198,000. However, actual revenue totaled $194,200. Consequently,
revenue was $3,800 less than it should have been, given the actual number of client-visits
for the month. This discrepancy is labeled as a $3,800 U (unfavorable)

On the Cost part, flexible budget indicates that electricity costs should have been $1,610 for
the 1,100 client-visits in March. However, the actual electricity cost was $1,550. Because the
cost was $60 less than we would have expected for the actual level of activity during the
period, it is labeled as a favorable variance, $60 F (Favorable)

Overall net operating income variance is $9,280 U (unfavorable). This means that given the
actual level of activity for the period, the net operating income was $9,280 lower than it
should have been. There are a number of reasons for this such as client gratuities which is
more than 50% larger than they should have been according to flexible budget.

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A Performance Report Combining Activity and Revenue and Spending Variance

Figure 8 – Combining Activity and Revenue and Spending Variance

To get a better idea of how the performance report accomplishes this task, look at hairstyling
supplies in the performance report. In the planning budget, this cost was $1,500, whereas
the actual cost for the period was $1,620. In the comparison of the planning budget to actual
results in Exhibit 9–3, this difference is shown as an unfavorable variance of $120.

The flexible budget performance report in Exhibit 9–7 provides a more valid assessment of
performance than simply comparing static planning budget costs to actual costs because
actual costs are compared to what costs should have been at the actual level of activity. In
other words, apples are compared to apples. When this is done, we see that the spending
variance for hairstyling supplies is $30 F (favorable) rather than $120 U (unfavorable) as it
was in the original static planning budget performance report (see previous figure)

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Daftar Pustaka

Garrison, R.H. 2006. Managerial Accounting. Edisi 11. Penerbit Salemba Empat. Jakarta

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