Question

As a manager, discuss how you would use or have used the concept of (flexible budgets and performance analysis) and (standard costs and variances)

Why might managers find a flexible-budget analysis more informative than static-budget analysis?

How might a manager gain insight into the causes of flexible-budget variances for direct materials, labor, and overhead? Provide at least one numerical example to support your thoughts.

Answer 1

Flexible budgets are an important part of performance appraisal in an organisation. A performance appraisal takes place end of the year. It reviews the actual performance with the targets set during the year. Now when actual performance is monitored against the target at end of the year it should be checked what was the level of activity in actual and the target set. If the target set of activity and actual set of activity are different the performance appraisal should be done against the flexible budget. A Flexible budget is a budget which revises the target at actual level of activity. It helps in meaningful evaluation of employee performance and helps employees in understanding where actually the performance is short of expectations. A flexible budget gives standard cost for actual level of activity and helps in finding variances against the actual performance

Flexible budgets are more informative than static budget analysis due to following reasons

• It helps in better cost management and control. Since the cost data are available at different level of activities the costs can be analysed in a systematic way to control
• It helps in understanding profitability at different levels of activity
• It helps in better evaluation of alternative opportunities available
• It helps in meaningful evaluation of performance and appraisal at end of the year for employees
• It helps in variance analysis and taking right corrective action to achieve the target results

Below example illustrates how flexible budget can help in understanding the variance.

Management should deep dive into each variance to understand the reasons like price, efficiency or rate variance