Discussion post –wk 6
kentucky79
Noreen4e_Ch10.pptPowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA
Copyright © 2017 by McGraw-Hill Education. All rights reserved.
Flexible Budgets and
Performance Analysis
Chapter 10
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Variance Analysis Cycle
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10-*
Learning Objective 1
Prepare a flexible budget.
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Characteristics of Flexible Budgets
Planning budgets
are prepared for
a single, planned
level of activity.
Performance evaluation is difficult when actual activity differs from the planned level of activity.
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Hmm! Comparing
static planning budgets
with actual costs
is like comparing
apples and oranges.
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Characteristics of Flexible Budgets
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Improve performance evaluation.
May be prepared for any activity
level in the relevant range.
Show costs that should have been
incurred at the actual level of
activity, enabling “apples to apples”
cost comparisons.
Help managers control costs.
Let’s look at Larry’s Lawn Service.
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Larry’s Lawn Service provides lawn care in a planned
community where all lawns are approximately the same size.
At the end of May, Larry prepared his June budget based on
mowing 500 lawns. Since all of the lawns are similar in size,
Larry felt that the number of lawns mowed in a month would
be the best way to measure overall activity for his business.
Deficiencies of the Static Planning Budget
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Larry’s Budget
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Deficiencies of the Static Planning Budget
Larry’s Planning Budget
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Sheet1
| Larry's Lawn Service | ||||||
| For the Month Ended June 30 | ||||||
| Revenue/Cost | Planning | |||||
| Formulas | Budget | |||||
| Number of lawns (Q) | 500 | |||||
| Revenue | ($75Q) | $ 37,500 | ||||
| Expenses: | ||||||
| Wages and salaries | ($5,000 + $30Q) | $ 20,000 | ||||
| Gasoline and supplies | ($9Q) | 4,500 | ||||
| Equipment maintenance | ($3Q) | 1,500 | ||||
| Office and shop utilities | ($1,000) | 1,000 | ||||
| Office and shop rent | ($2,000) | 2,000 | ||||
| Equipment Depreciation | ($2,500) | 2,500 | ||||
| Insurance | ($1,000) | 1,000 | ||||
| Total expenses | 32,500 | |||||
| Net operating income | $ 5,000 |
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Deficiencies of the Static Planning Budget
Larry’s Actual Results
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Sheet1
| Larry's Lawn Service | ||||
| For the Month Ended June 30 | ||||
| Actual | ||||
| Results | ||||
| Number of lawns | 550 | |||
| Revenue | $ 43,000 | |||
| Expenses: | ||||
| Wages and salaries | $ 23,500 | |||
| Gasoline and supplies | 5,100 | |||
| Equipment maintenance | 1,300 | |||
| Office and shop utilities | 950 | |||
| Office and shop rent | 2,000 | |||
| Equipment Depreciation | 2,500 | |||
| Insurance | 1,200 | |||
| Total expenses | 36,550 | |||
| Net operating income | $ 6,450 |
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Deficiencies of the Static Planning Budget
Larry’s Actual Results Compared with the Planning Budget
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Sheet1
| Larry's Lawn Service | ||||||||||
| For the Month Ended June 30 | ||||||||||
| Revenue/Cost | Actual | Planning | ||||||||
| Formulas | Results | Budget | Variances | |||||||
| Number of lawns (Q) | 550 | 500 | ||||||||
| Revenue | ($75Q) | $ 43,000 | $ 37,500 | $ 5,500 | F | |||||
| Expenses: | ||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 23,500 | $ 20,000 | $ 3,500 | U | |||||
| Gasoline and supplies | ($9Q) | 5,100 | 4,500 | 600 | U | |||||
| Equipment maintenance | ($3Q) | 1,300 | 1,500 | 200 | F | |||||
| Office and shop utilities | ($1,000) | 950 | 1,000 | 50 | F | |||||
| Office and shop rent | ($2,000) | 2,000 | 2,000 | - 0 | ||||||
| Equipment Depreciation | ($2,500) | 2,500 | 2,500 | - 0 | ||||||
| Insurance | ($1,000) | 1,200 | 1,000 | 200 | U | |||||
| Total expenses | 36,550 | 32,500 | 4,050 | U | ||||||
| Net operating income | $ 6,450 | $ 5,000 | $ 1,450 | F |
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Deficiencies of the Static Planning Budget
Larry’s Actual Results Compared with the Planning Budget
F = Favorable variance that occurs when actual costs are less than budgeted costs.
U = Unfavorable variance that occurs when actual costs are greater than budgeted costs.
F = Favorable variance that occurs when actual revenue is greater than budgeted revenue.
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Sheet1
| Larry's Lawn Service | ||||||||||
| For the Month Ended June 30 | ||||||||||
| Revenue/Cost | Actual | Planning | ||||||||
| Formulas | Results | Budget | Variances | |||||||
| Number of lawns (Q) | 550 | 500 | ||||||||
| Revenue | ($75Q) | $ 43,000 | $ 37,500 | $ 5,500 | F | |||||
| Expenses: | ||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 23,500 | $ 20,000 | $ 3,500 | U | |||||
| Gasoline and supplies | ($9Q) | 5,100 | 4,500 | 600 | U | |||||
| Equipment maintenance | ($3Q) | 1,300 | 1,500 | 200 | F | |||||
| Office and shop utilities | ($1,000) | 950 | 1,000 | 50 | F | |||||
| Office and shop rent | ($2,000) | 2,000 | 2,000 | - 0 | ||||||
| Equipment Depreciation | ($2,500) | 2,500 | 2,500 | - 0 | ||||||
| Insurance | ($1,000) | 1,200 | 1,000 | 200 | U | |||||
| Total expenses | 36,550 | 32,500 | 4,050 | U | ||||||
| Net operating income | $ 6,450 | $ 5,000 | $ 1,450 | F |
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Deficiencies of the Static Planning Budget
Larry’s Actual Results Compared with the Planning Budget
Since these variances are unfavorable, has Larry done a poor job controlling costs?
Since these variances are favorable, has Larry done a good job controlling costs?
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Sheet1
| Larry's Lawn Service | ||||||||||
| For the Month Ended June 30 | ||||||||||
| Revenue/Cost | Actual | Planning | ||||||||
| Formulas | Results | Budget | Variances | |||||||
| Number of lawns (Q) | 550 | 500 | ||||||||
| Revenue | ($75Q) | $ 43,000 | $ 37,500 | $ 5,500 | F | |||||
| Expenses: | ||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 23,500 | $ 20,000 | $ 3,500 | U | |||||
| Gasoline and supplies | ($9Q) | 5,100 | 4,500 | 600 | U | |||||
| Equipment maintenance | ($3Q) | 1,300 | 1,500 | 200 | F | |||||
| Office and shop utilities | ($1,000) | 950 | 1,000 | 50 | F | |||||
| Office and shop rent | ($2,000) | 2,000 | 2,000 | - 0 | ||||||
| Equipment Depreciation | ($2,500) | 2,500 | 2,500 | - 0 | ||||||
| Insurance | ($1,000) | 1,200 | 1,000 | 200 | U | |||||
| Total expenses | 36,550 | 32,500 | 4,050 | U | ||||||
| Net operating income | $ 6,450 | $ 5,000 | $ 1,450 | F |
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Deficiencies of the Static Planning Budget
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I don’t think I
can answer the
questions using
a static budget.
Actual activity is above
planned activity.
So, shouldn’t the variable
costs be higher if actual
activity is higher?
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The relevant question is . . .
“How much of the cost variances are due to higher activity and how much are due to cost control?”
To answer the question,
we must
the budget to the
actual level of activity.
Deficiencies of the Static Planning Budget
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How a Flexible Budget Works
To a budget, we need to know that:
Total variable costs change
in direct proportion to
changes in activity.
Total fixed costs remain
unchanged within the
relevant range.
Fixed
Variable
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Let’s prepare a
budget
for Larry’s Lawn Service.
How a Flexible Budget Works
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Preparing a Flexible Budget
Larry’s Flexible Budget
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Sheet1
| Larry's Lawn Service | ||||||
| For the Month Ended June 30 | ||||||
| Revenue/Cost | Flexible | |||||
| Formulas | Budget | |||||
| Number of lawns (Q) | 550 | |||||
| Revenue | ($75Q) | $ 41,250 | ||||
| Expenses: | ||||||
| Wages and salaries | ($5,000 + $30Q) | $ 21,500 | ||||
| Gasoline and supplies | ($9Q) | 4,950 | ||||
| Equipment maintenance | ($3Q) | 1,650 | ||||
| Office and shop utilities | ($1,000) | 1,000 | ||||
| Office and shop rent | ($2,000) | 2,000 | ||||
| Equipment Depreciation | ($2,500) | 2,500 | ||||
| Insurance | ($1,000) | 1,000 | ||||
| Total expenses | 34,600 | |||||
| Net operating income | $ 6,650 |
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Quick Check
What should the total wages and salaries cost be in a flexible budget for 600 lawns?
a. $18,000.
b. $20,000.
c. $23,000.
d. $25,000.
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10-*
Quick Check
What should be the total wages and salaries cost in a flexible budget for 600 lawns?
a. $18,000
b. $20,000.
c. $23,000.
d. $25,000.
Total wages and salaries cost
= $5,000 + ($30 per lawn 600 lawns)
$5,000 + $18,000 = $23,000
What should the total wages and salaries cost be in a flexible budget for 600 lawns?
a. $18,000.
b. $20,000.
c. $23,000.
d. $25,000.
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10-*
Learning Objective 2
Prepare a report showing activity variances.
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10-*
Activity Variances
Flexible
budget revenues
and expenses
Planning
budget revenues
and expenses
The differences between the budget amounts are called activity variances.
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10-*
Let’s use budgeting concepts to compute activity variances for Larry’s Lawn Service.
Activity Variances
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Activity Variances
Larry’s Flexible Budget Compared with the Planning Budget
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Sheet1
| Larry's Lawn Service | ||||||||||
| For the Month Ended June 30 | ||||||||||
| Revenue/Cost | Flexible | Planning | Activity | |||||||
| Formulas | Budget | Budget | Variances | |||||||
| Number of lawns (Q) | 550 | 500 | ||||||||
| Revenue | ($75Q) | $ 41,250 | $ 37,500 | $ 3,750 | F | |||||
| Expenses: | ||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 21,500 | $ 20,000 | $ 1,500 | U | |||||
| Gasoline and supplies | ($9Q) | 4,950 | 4,500 | 450 | U | |||||
| Equipment maintenance | ($3Q) | 1,650 | 1,500 | 150 | U | |||||
| Office and shop utilities | ($1,000) | 1,000 | 1,000 | - 0 | ||||||
| Office and shop rent | ($2,000) | 2,000 | 2,000 | - 0 | ||||||
| Equipment Depreciation | ($2,500) | 2,500 | 2,500 | - 0 | ||||||
| Insurance | ($1,000) | 1,000 | 1,000 | - 0 | ||||||
| Total expenses | 34,600 | 32,500 | 2,100 | U | ||||||
| Net operating income | $ 6,650 | $ 5,000 | $ 1,650 | F |
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Activity Variances
Larry’s Flexible Budget Compared with the Planning Budget
Activity and revenue increase by 10 percent, but net operating income increases by more than 10 percent due to the presence of fixed costs.
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Sheet1
| Larry's Lawn Service | ||||||||||
| For the Month Ended June 30 | ||||||||||
| Revenue/Cost | Flexible | Planning | Activity | |||||||
| Formulas | Budget | Budget | Variances | |||||||
| Number of lawns (Q) | 550 | 500 | ||||||||
| Revenue | ($75Q) | $ 41,250 | $ 37,500 | $ 3,750 | F | |||||
| Expenses: | ||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 21,500 | $ 20,000 | $ 1,500 | U | |||||
| Gasoline and supplies | ($9Q) | 4,950 | 4,500 | 450 | U | |||||
| Equipment maintenance | ($3Q) | 1,650 | 1,500 | 150 | U | |||||
| Office and shop utilities | ($1,000) | 1,000 | 1,000 | - 0 | ||||||
| Office and shop rent | ($2,000) | 2,000 | 2,000 | - 0 | ||||||
| Equipment Depreciation | ($2,500) | 2,500 | 2,500 | - 0 | ||||||
| Insurance | ($1,000) | 1,000 | 1,000 | - 0 | ||||||
| Total expenses | 34,600 | 32,500 | 2,100 | U | ||||||
| Net operating income | $ 6,650 | $ 5,000 | $ 1,650 | F |
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Learning Objective 3
Prepare a report showing revenue and spending variances.
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10-*
Revenue and Spending Variances
Actual revenue
Flexible budget revenue
The difference is a revenue variance.
Actual cost
Flexible budget cost
The difference is a spending variance.
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10-*
Now, let’s use budgeting concepts to compute revenue and spending variances for Larry’s Lawn Service.
Revenue and Spending Variances
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43.unknown
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Revenue and Spending Variances
Larry’s Flexible Budget Compared with the Actual Results
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$1,750 favorable
revenue variance
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Sheet1
| Larry's Lawn Service | ||||||||||
| For the Month Ended June 30 | ||||||||||
| Revenue and | ||||||||||
| Revenue/Cost | Actual | Flexible | Spending | |||||||
| Formulas | Results | Budget | Variances | |||||||
| Number of lawns (Q) | 550 | 550 | ||||||||
| Revenue | ($75Q) | $ 43,000 | $ 41,250 | $ 1,750 | F | |||||
| Expenses: | ||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 23,500 | $ 21,500 | $ 2,000 | U | |||||
| Gasoline and supplies | ($9Q) | 5,100 | 4,950 | 150 | U | |||||
| Equipment maintenance | ($3Q) | 1,300 | 1,650 | 350 | F | |||||
| Office and shop utilities | ($1,000) | 950 | 1,000 | 50 | F | |||||
| Office and shop rent | ($2,000) | 2,000 | 2,000 | - 0 | ||||||
| Equipment Depreciation | ($2,500) | 2,500 | 2,500 | - 0 | ||||||
| Insurance | ($1,000) | 1,200 | 1,000 | 200 | U | |||||
| Total expenses | 36,550 | 34,600 | 1,950 | U | ||||||
| Net operating income | $ 6,450 | $ 6,650 | $ 200 | U |
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Larry’s Flexible Budget Compared with the Actual Results
Revenue and Spending Variances
Spending
variances
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© 2017 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
Sheet1
| Larry's Lawn Service | ||||||||||
| For the Month Ended June 30 | ||||||||||
| Revenue and | ||||||||||
| Revenue/Cost | Actual | Flexible | Spending | |||||||
| Formulas | Results | Budget | Variances | |||||||
| Number of lawns (Q) | 550 | 550 | ||||||||
| Revenue | ($75Q) | $ 43,000 | $ 41,250 | $ 1,750 | F | |||||
| Expenses: | ||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 23,500 | $ 21,500 | $ 2,000 | U | |||||
| Gasoline and supplies | ($9Q) | 5,100 | 4,950 | 150 | U | |||||
| Equipment maintenance | ($3Q) | 1,300 | 1,650 | 350 | F | |||||
| Office and shop utilities | ($1,000) | 950 | 1,000 | 50 | F | |||||
| Office and shop rent | ($2,000) | 2,000 | 2,000 | - 0 | ||||||
| Equipment Depreciation | ($2,500) | 2,500 | 2,500 | - 0 | ||||||
| Insurance | ($1,000) | 1,200 | 1,000 | 200 | U | |||||
| Total expenses | 36,550 | 34,600 | 1,950 | U | ||||||
| Net operating income | $ 6,450 | $ 6,650 | $ 200 | U |
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Learning Objective 4
Prepare a performance report that combines activity variances and revenue and spending variances.
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10-*
Now, let’s use budgeting concepts to combine the revenue and spending variances reports for Larry’s Lawn Service.
A Performance Report Combining Activity and Revenue and Spending Variances
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46.unknown
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A Performance Report Combining Activity and Revenue and Spending Variances
© 2017 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
© 2017 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
Here we see a flexible budget performance report that shows both activity variances and revenue and spending variances. Note that the activity variances appear between the planning budget and the flexible budget and that the revenue and spending variances appear between the flexible budget and the actual results.
Sheet1
| Larry's Lawn Service | |||||||||||||
| Flexible Budget Performance Report | |||||||||||||
| For the Month Ended June 30 | |||||||||||||
| Revenue and | |||||||||||||
| Revenue/Cost | Actual | Spending | Flexible | Activity | Planning | ||||||||
| Formulas | Results | Variances | Budget | Variances | Budget | ||||||||
| Number of lawns (Q) | 550 | 550 | 500 | ||||||||||
| Revenue | ($75Q) | $ 43,000 | $ 1,750 | F | $ 41,250 | $ 3,750 | F | $ 37,500 | |||||
| Expenses: | |||||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 23,500 | $ 2,000 | U | $ 21,500 | $ 1,500 | U | $ 20,000 | |||||
| Gasoline and supplies | ($9Q) | 5,100 | 150 | U | 4,950 | 450 | U | 4,500 | |||||
| Equipment maintenance | ($3Q) | 1,300 | 350 | F | 1,650 | 150 | U | 1,500 | |||||
| Office and shop utilities | ($1,000) | 950 | 50 | F | 1,000 | - 0 | 1,000 | ||||||
| Office and shop rent | ($2,000) | 2,000 | - 0 | 2,000 | - 0 | 2,000 | |||||||
| Equipment Depreciation | ($2,500) | 2,500 | - 0 | 2,500 | - 0 | 2,500 | |||||||
| Insurance | ($1,000) | 1,200 | 200 | U | 1,000 | - 0 | 1,000 | ||||||
| Total expenses | 36,550 | 2,100 | U | 34,600 | 2,100 | U | 32,500 | ||||||
| Net operating income | $ 6,450 | $ 350 | U | $ 6,650 | $ 1,650 | F | $ 5,000 |
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A Performance Report Combining Activity and Revenue and Spending Variances
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50 lawns × $75 per lawn
50 lawns × $30 per lawn
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Sheet1
| Larry's Lawn Service | |||||||||||||
| Flexible Budget Performance Report | |||||||||||||
| For the Month Ended June 30 | |||||||||||||
| Revenue and | |||||||||||||
| Revenue/Cost | Actual | Spending | Flexible | Activity | Planning | ||||||||
| Formulas | Results | Variances | Budget | Variances | Budget | ||||||||
| Number of lawns (Q) | 550 | 550 | 500 | ||||||||||
| Revenue | ($75Q) | $ 43,000 | $ 1,750 | F | $ 41,250 | $ 3,750 | F | $ 37,500 | |||||
| Expenses: | |||||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 23,500 | $ 2,000 | U | $ 21,500 | $ 1,500 | U | $ 20,000 | |||||
| Gasoline and supplies | ($9Q) | 5,100 | 150 | U | 4,950 | 450 | U | 4,500 | |||||
| Equipment maintenance | ($3Q) | 1,300 | 350 | F | 1,650 | 150 | U | 1,500 | |||||
| Office and shop utilities | ($1,000) | 950 | 50 | F | 1,000 | - 0 | 1,000 | ||||||
| Office and shop rent | ($2,000) | 2,000 | - 0 | 2,000 | - 0 | 2,000 | |||||||
| Equipment Depreciation | ($2,500) | 2,500 | - 0 | 2,500 | - 0 | 2,500 | |||||||
| Insurance | ($1,000) | 1,200 | 200 | U | 1,000 | - 0 | 1,000 | ||||||
| Total expenses | 36,550 | 2,100 | U | 34,600 | 2,100 | U | 32,500 | ||||||
| Net operating income | $ 6,450 | $ 350 | U | $ 6,650 | $ 1,650 | F | $ 5,000 |
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$43,000 actual - $41,250 budget
A Performance Report Combining Activity and Revenue and Spending Variances
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© 2017 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
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| Larry's Lawn Service | |||||||||||||
| Flexible Budget Performance Report | |||||||||||||
| For the Month Ended June 30 | |||||||||||||
| Revenue and | |||||||||||||
| Revenue/Cost | Actual | Spending | Flexible | Activity | Planning | ||||||||
| Formulas | Results | Variances | Budget | Variances | Budget | ||||||||
| Number of lawns (Q) | 550 | 550 | 500 | ||||||||||
| Revenue | ($75Q) | $ 43,000 | $ 1,750 | F | $ 41,250 | $ 3,750 | F | $ 37,500 | |||||
| Expenses: | |||||||||||||
| Wages and salaries | ($5,000 + $30Q) | $ 23,500 | $ 2,000 | U | $ 21,500 | $ 1,500 | U | $ 20,000 | |||||
| Gasoline and supplies | ($9Q) | 5,100 | 150 | U | 4,950 | 450 | U | 4,500 | |||||
| Equipment maintenance | ($3Q) | 1,300 | 350 | F | 1,650 | 150 | U | 1,500 | |||||
| Office and shop utilities | ($1,000) | 950 | 50 | F | 1,000 | - 0 | 1,000 | ||||||
| Office and shop rent | ($2,000) | 2,000 | - 0 | 2,000 | - 0 | 2,000 | |||||||
| Equipment Depreciation | ($2,500) | 2,500 | - 0 | 2,500 | - 0 | 2,500 | |||||||
| Insurance | ($1,000) | 1,200 | 200 | U | 1,000 | - 0 | 1,000 | ||||||
| Total expenses | 36,550 | 2,100 | U | 34,600 | 2,100 | U | 32,500 | ||||||
| Net operating income | $ 6,450 | $ 350 | U | $ 6,650 | $ 1,650 | F | $ 5,000 |
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Performance Reports in Non-Profit Organizations
Non-profit organizations may receive funding from sources other than the sale of goods and services, so revenues may consist of both fixed and variable elements.
Universities
Tuition and fees
Donations
State funding
Endowments
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10-*
Performance Reports in Cost Centers
Performance reports are often prepared for cost centers. These reports should be prepared using the same principles discussed so far, except for the fact that these reports will not contain revenue or net operating income variances.
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10-*
Learning Objective 5
Prepare a flexible budget with more than one cost driver.
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Helen (H) - Slide 36 Changed the learning objective to match LO-5 as presented in Habitat (Noreen 4e).
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More than one cost
driver may be needed to
adequately explain all of
the costs in an organization.
The cost formulas used
to prepare a flexible
budget can be adjusted
to recognize multiple
cost drivers.
Flexible Budgets with Multiple Cost Drivers
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10-*
Because of the large unfavorable wages and salaries spending
variance, Larry decided to add an additional cost driver for wages and salaries. The variance is due primarily to the number of hours required for the additional edging and trimming. So Larry estimates the additional hours and builds those hours into both his revenue and expense budget formulas.
Flexible Budgets with Multiple Cost Drivers
© 2017 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
Larry’s New Budget
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10-*
Flexible Budgets with Multiple Cost Drivers
Larry’s Budget Based on More than One Cost Driver
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| Larry's Lawn Service | |||||
| For the Month Ended June 30 | |||||
| Revenue/Cost | Flexible | ||||
| Formulas | Budget | ||||
| Number of lawns (Q) | 550 | ||||
| Numer of hours (H) | 100 | ||||
| Revenues | ($75Q + $30H) | $ 44,250 | |||
| Expenses: | |||||
| Wages and salaries | ($5,000 + $30Q + $25H) | $ 24,000 | |||
| Gasoline and supplies | ($9Q) | 4,950 | |||
| Equipment maintenance | ($3Q) | 1,650 | |||
| Office and shop utilities | ($1,000) | 1,000 | |||
| Office and shop rent | ($2,000) | 2,000 | |||
| Equipment Depreciation | ($2,500) | 2,500 | |||
| Insurance | ($1,000) | 1,000 | |||
| Total expenses | 37,100 | ||||
| Net operating income | $ 7,150 |
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Learning Objective 6
Understand common errors made in preparing performance reports based on budgets and actual results.
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10-*
Some Common Errors
The most common errors when preparing performance
reports are to implicitly assume that:
1. All costs are fixed, or that;
- All costs are variable.
© 2017 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education
Assume all costs are fixed.
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10-*
Common Error 1: Assuming All Costs Are Fixed
Faulty Analysis Comparing Budgeted Amounts to Actual Amounts
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| Larry's Lawn Service | |||||||||
| For the Month Ended June 30 | |||||||||
| Actual | Planning | ||||||||
| Results | Budget | Variances | |||||||
| Number of lawns (Q) | 550 | 500 | |||||||
| Revenue | $ 43,000 | $ 37,500 | $ 5,500 | F | |||||
| Expenses: | |||||||||
| Wages and salaries | $ 23,500 | $ 20,000 | $ 3,500 | U | |||||
| Gasoline and supplies | 5,100 | 4,500 | 600 | U | |||||
| Equipment maintenance | 1,300 | 1,500 | 200 | F | |||||
| Office and shop utilities | 950 | 1,000 | 50 | F | |||||
| Office and shop rent | 2,000 | 2,000 | - 0 | ||||||
| Equipment Depreciation | 2,500 | 2,500 | - 0 | ||||||
| Insurance | 1,200 | 1,000 | 200 | U | |||||
| Total expenses | 36,550 | 32,500 | 4,050 | U | |||||
| Net operating income | $ 6,450 | $ 5,000 | $ 1,450 | F |
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Common Error 2: Assuming All Costs Are Variable
Faulty Analysis that Assumes All Budget Items Are Variable
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| Larry's Lawn Service | |||||||||||
| For the Month Ended June 30 | |||||||||||
| Planning | |||||||||||
| Actual | Planning | Budget | |||||||||
| Results | Budget | × 110% | Variances | ||||||||
| Number of lawns | 550 | 500 | 550 | ||||||||
| Revenue | $ 43,000 | $ 37,500 | $ 41,250 | $ 1,750 | F | ||||||
| Expenses: | |||||||||||
| Wages and salaries | $ 23,500 | $ 20,000 | $ 22,000 | $ 1,500 | U | ||||||
| Gasoline and supplies | 5,100 | 4,500 | 4,950 | 150 | U | ||||||
| Equipment maintenance | 1,300 | 1,500 | 1,650 | 350 | F | ||||||
| Office and shop utilities | 950 | 1,000 | 1,100 | 150 | F | ||||||
| Office and shop rent | 2,000 | 2,000 | 2,200 | 200 | F | ||||||
| Equipment Depreciation | 2,500 | 2,500 | 2,750 | 250 | F | ||||||
| Insurance | 1,200 | 1,000 | 1,100 | 100 | U | ||||||
| Total expenses | 36,550 | 32,500 | 35,750 | 800 | U | ||||||
| Net operating income | $ 6,450 | $ 5,000 | $ 5,500 | $ 950 | F |
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End of Chapter 10
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Revenue/CostPlanning
FormulasBudget
Number of lawns (Q)500
Revenue($75Q)37,500$
Expenses:
Wages and salaries($5,000 + $30Q)20,000$
Gasoline and supplies($9Q)4,500
Equipment maintenance($3Q)1,500
Office and shop utilities($1,000)1,000
Office and shop rent($2,000)2,000
Equipment Depreciation($2,500)2,500
Insurance($1,000)1,000
Total expenses32,500
Net operating income5,000$
Larry's Lawn Service
For the Month Ended June 30
Actual
Results
Number of lawns 550
Revenue43,000$
Expenses:
Wages and salaries23,500$
Gasoline and supplies5,100
Equipment maintenance1,300
Office and shop utilities950
Office and shop rent2,000
Equipment Depreciation2,500
Insurance1,200
Total expenses36,550
Net operating income6,450$
Larry's Lawn Service
For the Month Ended June 30
Revenue/CostActualPlanning
FormulasResultsBudgetVariances
Number of lawns (Q)550 500
Revenue($75Q)43,000$ 37,500$ 5,500$ F
Expenses:
Wages and salaries($5,000 + $30Q)23,500$ 20,000$ 3,500$ U
Gasoline and supplies($9Q)5,100 4,500 600 U
Equipment maintenance($3Q)1,300 1,500 200 F
Office and shop utilities($1,000)950 1,000 50 F
Office and shop rent($2,000)2,000 2,000 -
Equipment Depreciation($2,500)2,500 2,500 -
Insurance($1,000)1,200 1,000 200 U
Total expenses36,550 32,500 4,050 U
Net operating income6,450$ 5,000$ 1,450$ F
Larry's Lawn Service
For the Month Ended June 30
Revenue/Cost Flexible
FormulasBudget
Number of lawns (Q)550
Revenue($75Q)41,250$
Expenses:
Wages and salaries($5,000 + $30Q)21,500$
Gasoline and supplies($9Q)4,950
Equipment maintenance($3Q)1,650
Office and shop utilities($1,000)1,000
Office and shop rent($2,000)2,000
Equipment Depreciation($2,500)2,500
Insurance($1,000)1,000
Total expenses34,600
Net operating income6,650$
Larry's Lawn Service
For the Month Ended June 30
Revenue/Cost FlexiblePlanningActivity
FormulasBudgetBudgetVariances
Number of lawns (Q)550 500
Revenue($75Q)41,250$ 37,500$ 3,750$ F
Expenses:
Wages and salaries($5,000 + $30Q)21,500$ 20,000$ 1,500$ U
Gasoline and supplies($9Q)4,950 4,500 450 U
Equipment maintenance($3Q)1,650 1,500 150 U
Office and shop utilities($1,000)1,000 1,000 -
Office and shop rent($2,000)2,000 2,000 -
Equipment Depreciation($2,500)2,500 2,500 -
Insurance($1,000)1,000 1,000 -
Total expenses34,600 32,500 2,100 U
Net operating income6,650$ 5,000$ 1,650$ F
Larry's Lawn Service
For the Month Ended June 30
Revenue/Cost FlexiblePlanningActivity
FormulasBudgetBudgetVariances
Number of lawns (Q)550 500
Revenue($75Q)41,250$ 37,500$ 3,750$ F
Expenses:
Wages and salaries($5,000 + $30Q)21,500$ 20,000$ 1,500$ U
Gasoline and supplies($9Q)4,950 4,500 450 U
Equipment maintenance($3Q)1,650 1,500 150 U
Office and shop utilities($1,000)1,000 1,000 -
Office and shop rent($2,000)2,000 2,000 -
Equipment Depreciation($2,500)2,500 2,500 -
Insurance($1,000)1,000 1,000 -
Total expenses34,600 32,500 2,100 U
Net operating income6,650$ 5,000$ 1,650$ F
Larry's Lawn Service
For the Month Ended June 30
Revenue and
Revenue/CostActualFlexibleSpending
FormulasResultsBudgetVariances
Number of lawns (Q)550 550
Revenue($75Q)43,000$ 41,250$ 1,750$ F
Expenses:
Wages and salaries($5,000 + $30Q)23,500$ 21,500$ 2,000$ U
Gasoline and supplies($9Q)5,100 4,950 150 U
Equipment maintenance($3Q)1,300 1,650 350 F
Office and shop utilities($1,000)950 1,000 50 F
Office and shop rent($2,000)2,000 2,000 -
Equipment Depreciation($2,500)2,500 2,500 -
Insurance($1,000)1,200 1,000 200 U
Total expenses36,550 34,600 1,950 U
Net operating income6,450$ 6,650$ 200$ U
Larry's Lawn Service
For the Month Ended June 30
Revenue and
Revenue/Cost ActualSpendingFlexibleActivityPlanning
FormulasResultsVariancesBudgetVariancesBudget
Number of lawns (Q)550 550 500
Revenue($75Q)43,000$ 1,750$ F41,250$ 3,750$ F37,500$
Expenses:
Wages and salaries($5,000 + $30Q)23,500$ 2,000$ U21,500$ 1,500$ U20,000$
Gasoline and supplies($9Q)5,100 150 U4,950 450 U4,500
Equipment maintenance($3Q)1,300 350 F1,650 150 U1,500
Office and shop utilities($1,000)950 50 F1,000 - 1,000
Office and shop rent($2,000)2,000 - 2,000 - 2,000
Equipment Depreciation($2,500)2,500 - 2,500 - 2,500
Insurance($1,000)1,200 200 U1,000 - 1,000
Total expenses36,550 2,100 U34,600 2,100 U32,500
Net operating income6,450$ 350$ U6,650$ 1,650$ F5,000$
Larry's Lawn Service
For the Month Ended June 30
Flexible Budget Performance Report
Revenue/Cost Flexible
FormulasBudget
Number of lawns (Q)550
Numer of hours (H)100
Revenues($75Q + $30H)44,250$
Expenses:
Wages and salaries($5,000 + $30Q + $25H)24,000$
Gasoline and supplies($9Q)4,950
Equipment maintenance($3Q)1,650
Office and shop utilities($1,000)1,000
Office and shop rent($2,000)2,000
Equipment Depreciation($2,500)2,500
Insurance($1,000)1,000
Total expenses37,100
Net operating income7,150$
Larry's Lawn Service
For the Month Ended June 30
ActualPlanning
ResultsBudgetVariances
Number of lawns (Q)550 500
Revenue43,000$ 37,500$ 5,500$ F
Expenses:
Wages and salaries23,500$ 20,000$ 3,500$ U
Gasoline and supplies5,100 4,500 600 U
Equipment maintenance1,300 1,500 200 F
Office and shop utilities950 1,000 50 F
Office and shop rent2,000 2,000 -
Equipment Depreciation2,500 2,500 -
Insurance1,200 1,000 200 U
Total expenses36,550 32,500 4,050 U
Net operating income6,450$ 5,000$ 1,450$ F
Larry's Lawn Service
For the Month Ended June 30
Planning
ActualPlanningBudget
ResultsBudget× 110%Variances
Number of lawns 550 500 550
Revenue43,000$ 37,500$ 41,250$ 1,750$ F
Expenses:
Wages and salaries23,500$ 20,000$ 22,000$ 1,500$ U
Gasoline and supplies5,100 4,500 4,950 150 U
Equipment maintenance1,300 1,500 1,650 350 F
Office and shop utilities950 1,000 1,100 150 F
Office and shop rent2,000 2,000 2,200 200 F
Equipment Depreciation2,500 2,500 2,750 250 F
Insurance1,200 1,000 1,100 100 U
Total expenses36,550 32,500 35,750 800 U
Net operating income6,450$ 5,000$ 5,500$ 950$ F
Larry's Lawn Service
For the Month Ended June 30
