Chapter 5

Flexible Budget and

Performance Analysis

5/25/23
After studying Chapter 5, you LOGO

should be able to:

1. Prepare a flexible budget.
2. Prepare a report showing activity variances.
3. Prepare a report showing revenue and spending variances.
4.
Prepare a performance report that combines activity variances and revenue and
spending variances.
5. Prepare a flexible budget with more than one cost driver.
6.
Understand common errors made in preparing performance reports based on
budgets and actual results.

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* Flexible Budgets

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5.1.1. Characteristics of a Flexible LOGO

Budget
• The budgets that we explored in the last chapter
were planning budgets.
• Flexible budgets take into account how changes in
activity affect costs

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 5.1.2. Deficiencies of the Static LOGO

Planning Budget
* For example:
* They determined that the cost formula for electricity
should be $1,500+ $0.10q, where q equals 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 1,000
client-visits, it was easy to compute the budgeted amount for
each line item in the budget. For example, using the cost
formula, the budgeted cost for electricity was set at
$1,600(=$1,500+$0.10×1,000). They prepare the budget
income statement in Exhibit 4–1 as below:

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Exhibit 5–1: Planning budget
Dzung’s Hairstyling Planning Budget For the Month Ended March
31
client – visit ( 1,000
Revenue ($180 × ) 180,000
Expenses
102,000
Wages and salaries ($65,000 + $37.00)
Hairstyling supplies ($1.50) 1,500
Client gratuities ($4.10) 4,100
Electricity ($1,500 + $0.10) 1,600
Rent ($28,500) 28,500
Liability insurance ($2,800) 2,800
Employee health insurance ($21,300) 21,300

Miscellaneous ($1,200 + $0.20) 1,400

Total expense 163,200
Net operating income
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 Exhibit 5–2: Actual results – Income
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Staement
Dzung’s Hairstyling Income Staement For the
Month Ended March 31
client – visit 1,100
Revenue 194,200
Expenses
Wages and salaries 106,900
Hairstyling supplies 1,620
Client gratuities 6,870
Electricity 1,550
Rent 28,500
Liability insurance 2,800
Employee health insurance 22,600
Miscellaneous 2,130
Total expense 172,970
Net operating income $21,230
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 Exhibit 5–3: Comparison of Planning Budget to Actual Results
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Dzung’s Hairstyling Comparison of Planning Budget to Actual Results Planning

Budget For the Month Ended March 31
Planning Actual
Variances
budget results
client – visit 1,000 1,100
Revenue 180,000 194,200 14,200 F
Expenses
Wages and salaries 102,000 106,900 4,900 U
Hairstyling supplies 1,500 1,620 120 U
Client gratuities 4,100 6,870 2,770 U
Electricity 1,600 1,550 50 F
Rent 28,500 28,500 0
Liability insurance 2,800 2,800 0
Employee health insurance 21,300 22,600 1,300 U
Miscellaneous 1,400 2,130 730 U
Total expense 163,200 172,970 9,770 U
Net operating income $16,800 $21,230 $4,430 F
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5.1.3. How a Flexible Budget Works
Dzung’s Hairstyling Flexible Budget For the Month Ended March 31
client – visit ( 1,100
Revenue ($180 × ) 198,000
Expenses
Wages and salaries ($65,000 + 105,700
$37.00)
Hairstyling supplies ($1.50) 1,650
Client gratuities ($4.10) 4,510
Electricity ($1,500 + $0.10) 1,610
Rent ($28,500) 28,500
Liability insurance ($2,800) 2,800
Employee health insurance ($21,300) 21,300

Miscellaneous ($1,200 + $0.20) 1,420

Total expense 167,490
Net operating income $30,510
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 5.2. Flexible Budget Variances
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* To answer Dzung’s questions concerning the discrepancies

between budgeted and actual costs, we will need to break down
the variances shown in Exhibit 4–3 into two types of variances -
activity variances and revenue and spending variances.

* We do that in the next two sections.

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5.2.1. Activity Variances
Dzung’s Hairstyling Activity Variances For the Month Ended March 31
Planning Flexible Activity
budget budget Variances
Client – visit ( 1,000 1,100
Revenue ($180 × ) 180,000 198,000 18,000 F
Expenses
Wages and salaries ($65,000 + $37.00) 102,000 105,700 3,700 U
Hairstyling supplies ($1.50) 1,500 1,650 150 U
Client gratuities ($4.10) 4,100 4,510 410 U
Electricity ($1,500 + $0.10) 1,600 1,610 10 U
Rent ($28,500) 28,500 28,500 0
Liability insurance ($2,800) 2,800 2,800 0
Employee health insurance ($21,300) 21,300 21,300 0
Miscellaneous ($1,200 + $0.20) 1,400 1,420 20 U
Total expense 163,200 167,490 4,290 U
Net operating income $16,800 $30,510 $13,710 F

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 5.2.2. Revenue and Spending Variances
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Dzung’s Hairstyling Revenue and Spending Variances For the Month

Ended March 31
Flexible Actual Activity
budget results Variances
Client – visit ( 1,100 1,100
Revenue ($180 × ) 198,000 194,200 3,800 U
Expenses
Wages and salaries ($65,000 + $37.00) 105,700 106,900 1,200 U
Hairstyling supplies ($1.50) 1,650 1,620 30 F
Client gratuities ($4.10) 4,510 6,870 2,360 U
Electricity ($1,500 + $0.10) 1,610 1,550 60 F
Rent ($28,500) 28,500 28,500 0
Liability insurance ($2,800) 2,800 2,800 0
Employee health insurance ($21,300) 21,300 22,600 1,300 U
Miscellaneous ($1,200 + $0.20) 1,420 2,130 710 U
Total expense 167,490 172,970 5,480 U
Net operating income $30,510 $21,230 $9,280 U

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 5.2.3. A Performance Report Combining Activity and Revenue and Spending LOGO
Variances

Dzung’s Hairstyling Flexible Budget Performance Report For the Month Ended March 31
Revenue
Planning Activity Flexible and Actual
Budget Variances budget Spending Results
(1) (2) - (1) (2) Variances (3)
(3-2)
Client – visit ( 1,000 1,100 1,100
Revenue ($180 × ) 180,000 18,000 F 198,000 3,800 U 194,200
Expenses
Wages and salaries ($65,000 + 3,700 U
102,000 105,700 1,200 U 106,900
$37.00)
Hairstyling supplies ($1.50) 1,500 150 U 1,650 30 F 1,620
Client gratuities ($4.10) 4,100 410 U 4,510 2,360 U 6,870
Electricity ($1,500 + $0.10) 1,600 10 U 1,610 60 F 1,550
Rent ($28,500) 28,500 0 28,500 0 28,500
Liability insurance ($2,800) 2,800 0 2,800 0 2,800
Employee health insurance ($21,300)
21,300 0 21,300 1,300 U 22,600
Miscellaneous ($1,200 + $0.20) 1,400 20 U 1,420 710 U 2,130
Total expense 163,200 4,290 U 167,490 5,480 U 172,970
Net operating income $16,800 $13,710 F $30,510 $9,280 U $21,230

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5.2.4. Performance Reports in Nonprofit
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0rganizations
* For example:
* The Seattle Opera Company’s revenue in a recent year consisted of
grants and donations of $12,719,000 and ticket sales of $8,125,000 (or
about $75.35 per ticket sold).
* Consequently, the revenue formula for the opera can be written as:
* Revenue = $12,719,000 + $75.35q
* Where q is the number of tickets sold. In other respects, the
performance report for the Seattle Opera and other nonprofit
organizations would be similar to the performance report in Exhibit 4–
7.

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5.2.5. Performance Reports in Cost
Centers
* Performance reports are often prepared for organizations
that do not have any source of outside revenue.
*
* In particular, in a large organization a performance report
may be prepared for each department—including departments
that do not sell anything to out-siders.

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5.3. Flexible Budgets with Multiple Cost
Drivers
Dzung’s Hairstyling Flexible Budget For the Month Ended March 31
client – visit ( 1,100
185
Revenue ($180 × ) 198,000
Expenses
Wages and salaries ($65,000 + 220) 105,700
Hairstyling supplies ($1.50) 1,650
Client gratuities ($4.10) 4,510
Electricity ($390 + $0.10) 1,610
Rent ($28,500) 28,500
Liability insurance ($2,800) 2,800
Employee health insurance ($21,300) 21,300
Miscellaneous ($1,200 + $0.20) 1,420
Total expense 167,490
Net operating income $30,510

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4.4. Some Common Errors

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