Question

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• 9–1What is a static planning budget?

• 9–2What is a flexible budget and how does it differ from a static planning budget?

• 9–3What are some of the possible reasons that actual results may differ from what had been budgeted at the beginning of a period?

• 9–4Why is it difficult to interpret a difference between how much expense was budgeted and how much was actually spent?

• 9–5What is an activity variance and what does it mean?

• 9–6What is a revenue variance and what does it mean?

• 9–7What is a spending variance and what does it mean?

• 9–8What does a flexible budget performance report do that a simple comparison of budgeted to actual results does not do?

• 9–9How does a flexible budget based on two cost drivers differ from a flexible budget based on one cost driver?

• 9–10What assumption is implicitly made about cost behavior when actual results are directly compared to a static planning budget? Why is this assumption questionable?

9–11What assumption is implicitly made about cost behavior when all of the items in a static planning budget are adjusted in proportion to a change in activity? Why is this assumption questionable?

Answer 1

9-1 A Static budget is a planning budget fixed at the beginning of the year for a particular level of activity. It is a rigid budget and a target for the year to be achieved by various departments and divisions of the firm

9-2 A flexible budget is a variation of planning or static budget for actual level of activity. The actual level of activity can be different from the static level of activity. Hence to compare the same level of actual activity a flexible budget is prepared.

9-3 Some of the reasons for variation of actual results from the budget are

· Variations in raw material prices

· Variation in raw material usage due to manufacturing process

· Different actual labor rates

· Actual labor hours used may be different in production

9-4 The reason for difficulty in interpretation is due to the underlying assumption made in budget and actual amount which can be different. The difference needs to be analysed for volume related affect and then price and efficiency impact

9-5 Activity variance is the difference between static budget and flexible budget and this variation is cause due to volume difference only. This means the firm has not achieved the budgeted volume

9-6 Revenue variance is the difference between flexible budget sales and actual sales. It is driven by selling price changes between budget and actual

9-7 Spending variance is the difference between flexible budget expenses and actual expenses. It is driven by price and efficiency for variable costs and expenditure and production volume variance for fixed cost

9-8 A Flexible budget performance reports gives the total variance into 2 buckets. The first one is sales volume variance caused by difference in static budget volume and actual volume. The second one is flexible budget variance caused by price and efficiency factors.

9-9 A flexible budget based on 2 cost driver needs to be calculated separately for the 2 cost drivers and then added to get a final flexible budget. A single cost driver flexible budget is a direct way of preparation of flexible budget

9-10 when comparison is made between actual results and static planning budget it is assumed all the costs are fixed. This is questionable because variable manufacturing costs varies in relation to volume or a level of activity.

9-11 the assumption made about cost behaviour is variable costs move in linear to activity level and fixed cost is constant. The assumption is questionable because the variable cost can be impact by factors other than activity levels and the movement in cost can be non –linear to activity levels.