Flexible vs Static Budgets
Static Budget
A static budget is a type of budget that incorporates anticipated values about inputs and outputs that are conceived before the period in question begins, often based on the previous year. A static budget–which is a forecast of revenue and expenses over a specific period–remains unchanged even with increases or decreases in sales and production volumes. However, when compared to the actual results that are received after the fact, the numbers from static budgets can be quite different from the actual results.
Flexible Budget
A flexible budget is a budget that is adjusted (flexes) for various output levels, unlike the static budget which only budgets for a single output level. It is a better tool for evaluating costs because it allows management to compare actual output to a budget with the same level of activity.
Flexible Budget Performance Report
This report compares the actual level of activity with a the corresponding flexible budget to measure variances in each cost component. The variance is simply the difference between the actual and the budgeted, and it is considered favourable (F) if the actual result is less than the budgeted, and unfavourable (U) if it is greater.
Comprehensive Performance Report
The comprehensive budget performance report compares the actual activity to the flexible and static budget. A variance is computed between the Actual and Flexible, as well as between the Flexible and Static, then the two variances are combined to a total variance.
The variable between Actual and Flexible is called Flexible Budget Variance
The variance between Flexible and Static is called Sales Volume Variance
Example: Preparing a Flexible Budget
Cars'4'Cheap is a Canadian company that owns and operates a large car wash near Kingston, ON. The following table provides data concerning the company's cost.
The company charges customers $12 for a car wash.
Prepare a flexible budget for the month of September for 6,700 and 7,700 washed cars.
Example: Preparing a Flexible Budget Performance Report
Cars'4'Cheap is a Canadian company that owns and operates a large car wash near Kingston, ON. The following table provides data concerning the company's cost.
Cars'4'Cheap is a Canadian company that owns and operates a large car wash near Kingston, ON. The following table provides data concerning the company's cost.
The company charges customers $12 for a car wash.
Prepare a flexible budget performance report for September assuming 6,700 cars were washed.
Example: Preparing a Comprehensive Budget Performance Report
Cars'4'Cheap is a Canadian company that owns and operates a large car wash near Kingston, ON. The following table provides data concerning the company's cost.
Cars'4'Cheap is a Canadian company that owns and operates a large car wash near Kingston, ON. The following table provides data concerning the company's cost.
The company charges customers $12 for a car wash
Prepare a comprehensive performance report for September assuming 6,700 cars were washed and the static budget for September was based on 7,700 washed cars.
