78 12:2: Flexible Budgets
-
-
Last updated
- Dec 28, 2020
Learning Objectives
- Understand how flexible budgets are used to evaluate performance.
Question: The master budget in Chapter 11 was prepared for only one level of activity (activity was measured by the number of units sold, which was budgeted at 200,000 units). Although this works well in the planning phase of budgeting, it is not appropriate for the control phase. Actual sales rarely match budgeted sales. When actual sales differ from budgeted sales, it is inappropriate and perhaps unfair to evaluate employee performance by comparing actual results to the master budget . If actual sales volume is higher than the master budget, variable costs should be higher than the master budget. The opposite is true as well. How do organizations modify the master budget to adjust for actual sales?
Question: Imagine being the production manager at Jerry’s Ice Cream, and you are evaluated based on the quantity of direct materials used in production. Would it be fair to compare the materials used to produce 210,000 units with the master budget showing the materials that should have been used to produce 200,400 units?
Key Takeaway
A flexible budget is a revised master budget that represents expected costs given actual sales. Costs in the flexible budget are compared to actual costs to evaluate performance.
Review problem 12.1
What is a flexible budget , and why do companies use a flexible budget to evaluate production managers?
Definition
- A revised master budget based on the actual activity level.
