{"id":498,"date":"2018-04-17T23:39:17","date_gmt":"2018-04-17T23:39:17","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=498"},"modified":"2024-04-29T17:20:47","modified_gmt":"2024-04-29T17:20:47","slug":"flexible-budget-report","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/flexible-budget-report\/","title":{"raw":"Flexible Budget Report","rendered":"Flexible Budget Report"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Create a flexible budget report that shows sales, activity, labor, or cost variances<\/li>\r\n<\/ul>\r\n<\/div>\r\nJake is now working on a flexible budget for his sales department! His supervisor gave him to green light to keep selling and keep paying his sales people! It looks to be a record year. As he works on his budget, he notices that even though increased sales cause increases in some of the expenses in his department, others, such as rent, stay the same. This makes Jake really happy, as the net profit for his department is rising along with the increase in sales! Let\u2019s take a look at how a flexible budget can help businesses grow, and offer a better picture of where budgeted expenses should be.\r\n\r\nIn the previous section, we started to talk about how the budget needs to be a fluid document. Flexible budgeting is important for businesses, as the world isn\u2019t static!\r\n\r\nThe budget we prepared is called a planning budget. This budget is put together before the year starts, and is a static budget. We can\u2019t use it for accessing if costs are being effectively controlled. It doesn\u2019t let us compare apples to apples.\r\n\r\nSo what if instead of selling 2000 pair of shoes, we sold 3000? Would it be fair to hold our production manager responsible for going over costs when he manufactured 1000 more pair of shoes? The answer to this is obviously <strong>no<\/strong>, so how can we fix this problem? On the other hand, if we produce less, and our electricity bill is lower, it would note be fair to give kudos for reducing energy costs!\r\n\r\nFlexible budgets take into account how changes in production affect costs. So if production goes up, costs would go up. In converse, if we were to sell fewer shoes, our costs would go down!\r\n\r\nSo, a flexible budget lets us see what the costs should have been at a particular level of activity. Let\u2019s look at an example:\r\n<table style=\"border-collapse: collapse; width: 100%;\" border=\"1\">\r\n<thead>\r\n<tr style=\"height: 30px;\">\r\n<th style=\"width: 20%; height: 30px;\" scope=\"row\"><\/th>\r\n<th style=\"width: 20%; height: 30px;\" scope=\"col\">Planning Budget<\/th>\r\n<th style=\"width: 20%; height: 30px;\" scope=\"col\">Flexible Budget<\/th>\r\n<th style=\"width: 20%; height: 30px;\" scope=\"col\">Activity Variance<\/th>\r\n<th style=\"width: 20%; height: 30px;\" scope=\"col\">Favorable or Unfavorable<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Classes taken<\/th>\r\n<td style=\"width: 20%; height: 15px;\">500<\/td>\r\n<td style=\"width: 20%; height: 15px;\">600<\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Revenue ($14\/class)<\/th>\r\n<td style=\"width: 20%; height: 15px;\">$7,000<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$8,400<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$1,400<\/td>\r\n<td style=\"width: 20%; height: 15px;\">Favorable<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\"><\/th>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"col\"><strong>Expenses<\/strong><\/th>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Wages and Salaries<\/th>\r\n<td style=\"width: 20%; height: 15px;\">$3,500<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$4,200<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$700<\/td>\r\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Yoga Supplies<\/th>\r\n<td style=\"width: 20%; height: 15px;\">$250<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$300<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$50<\/td>\r\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Utilities<\/th>\r\n<td style=\"width: 20%; height: 15px;\">$500<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$600<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$100<\/td>\r\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Rent<\/th>\r\n<td style=\"width: 20%; height: 15px;\">$500<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$500<\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Insurance<\/th>\r\n<td style=\"width: 20%; height: 15px;\">$100<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$100<\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Other Expenses<\/th>\r\n<td style=\"width: 20%; height: 15px;\">$250<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$300<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$50<\/td>\r\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Total Expense<\/th>\r\n<td style=\"width: 20%; height: 15px;\">$5,100<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$6,000<\/td>\r\n<td style=\"width: 20%; height: 15px;\">$900<\/td>\r\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Net Operating Income<\/th>\r\n<td style=\"width: 20%; height: 15px;\"><span style=\"text-decoration: underline;\"><strong>$1,900<\/strong><\/span><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><span style=\"text-decoration: underline;\"><strong>$2,400<\/strong><\/span><\/td>\r\n<td style=\"width: 20%; height: 15px;\"><span style=\"text-decoration: underline;\"><strong>$500<\/strong><\/span><\/td>\r\n<td style=\"width: 20%; height: 15px;\">Favorable<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSo let\u2019s look at Simply Yoga. If their planning budget assumed 500 classes to be taken, but there were actually 600 classes taken in the time period, how would expenses react? Well, in this case, it looks like wages area based on a per class cost of $7 [latex]\\bigg(\\dfrac{\\$3500}{500}=\\$7[\/latex], and so does [latex]\\dfrac{\\$4200}{600}=\\$7\\big)[\/latex]. So if more classes are taken, it is a <strong>favorable<\/strong>\u00a0revenue variance, meaning the studio made more money, but an unfavorable wages and salaries variance, as they spent more on wages than budgeted. But was it a good thing to spend more? Yes! Even though expenses were higher, the net operating income is higher. So this is a good thing! This flexible budget allows us to make changes in the expense accounts as the number of classes taken changes.\r\n\r\nSo why did rent and insurance not change? Remember back to our Hupana Running Company example. Those kinds of expenses are fixed, so it doesn\u2019t matter how many shoes we sell or classes are taken, they remain the same. This type of budgeting helps us to see how increases in revenue affect net profit.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/e04fb039-4dd6-481c-a7ed-af24817615aa\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Create a flexible budget report that shows sales, activity, labor, or cost variances<\/li>\n<\/ul>\n<\/div>\n<p>Jake is now working on a flexible budget for his sales department! His supervisor gave him to green light to keep selling and keep paying his sales people! It looks to be a record year. As he works on his budget, he notices that even though increased sales cause increases in some of the expenses in his department, others, such as rent, stay the same. This makes Jake really happy, as the net profit for his department is rising along with the increase in sales! Let\u2019s take a look at how a flexible budget can help businesses grow, and offer a better picture of where budgeted expenses should be.<\/p>\n<p>In the previous section, we started to talk about how the budget needs to be a fluid document. Flexible budgeting is important for businesses, as the world isn\u2019t static!<\/p>\n<p>The budget we prepared is called a planning budget. This budget is put together before the year starts, and is a static budget. We can\u2019t use it for accessing if costs are being effectively controlled. It doesn\u2019t let us compare apples to apples.<\/p>\n<p>So what if instead of selling 2000 pair of shoes, we sold 3000? Would it be fair to hold our production manager responsible for going over costs when he manufactured 1000 more pair of shoes? The answer to this is obviously <strong>no<\/strong>, so how can we fix this problem? On the other hand, if we produce less, and our electricity bill is lower, it would note be fair to give kudos for reducing energy costs!<\/p>\n<p>Flexible budgets take into account how changes in production affect costs. So if production goes up, costs would go up. In converse, if we were to sell fewer shoes, our costs would go down!<\/p>\n<p>So, a flexible budget lets us see what the costs should have been at a particular level of activity. Let\u2019s look at an example:<\/p>\n<table style=\"border-collapse: collapse; width: 100%;\">\n<thead>\n<tr style=\"height: 30px;\">\n<th style=\"width: 20%; height: 30px;\" scope=\"row\"><\/th>\n<th style=\"width: 20%; height: 30px;\" scope=\"col\">Planning Budget<\/th>\n<th style=\"width: 20%; height: 30px;\" scope=\"col\">Flexible Budget<\/th>\n<th style=\"width: 20%; height: 30px;\" scope=\"col\">Activity Variance<\/th>\n<th style=\"width: 20%; height: 30px;\" scope=\"col\">Favorable or Unfavorable<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Classes taken<\/th>\n<td style=\"width: 20%; height: 15px;\">500<\/td>\n<td style=\"width: 20%; height: 15px;\">600<\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Revenue ($14\/class)<\/th>\n<td style=\"width: 20%; height: 15px;\">$7,000<\/td>\n<td style=\"width: 20%; height: 15px;\">$8,400<\/td>\n<td style=\"width: 20%; height: 15px;\">$1,400<\/td>\n<td style=\"width: 20%; height: 15px;\">Favorable<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\"><\/th>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"col\"><strong>Expenses<\/strong><\/th>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Wages and Salaries<\/th>\n<td style=\"width: 20%; height: 15px;\">$3,500<\/td>\n<td style=\"width: 20%; height: 15px;\">$4,200<\/td>\n<td style=\"width: 20%; height: 15px;\">$700<\/td>\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Yoga Supplies<\/th>\n<td style=\"width: 20%; height: 15px;\">$250<\/td>\n<td style=\"width: 20%; height: 15px;\">$300<\/td>\n<td style=\"width: 20%; height: 15px;\">$50<\/td>\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Utilities<\/th>\n<td style=\"width: 20%; height: 15px;\">$500<\/td>\n<td style=\"width: 20%; height: 15px;\">$600<\/td>\n<td style=\"width: 20%; height: 15px;\">$100<\/td>\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Rent<\/th>\n<td style=\"width: 20%; height: 15px;\">$500<\/td>\n<td style=\"width: 20%; height: 15px;\">$500<\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Insurance<\/th>\n<td style=\"width: 20%; height: 15px;\">$100<\/td>\n<td style=\"width: 20%; height: 15px;\">$100<\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<td style=\"width: 20%; height: 15px;\"><\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Other Expenses<\/th>\n<td style=\"width: 20%; height: 15px;\">$250<\/td>\n<td style=\"width: 20%; height: 15px;\">$300<\/td>\n<td style=\"width: 20%; height: 15px;\">$50<\/td>\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Total Expense<\/th>\n<td style=\"width: 20%; height: 15px;\">$5,100<\/td>\n<td style=\"width: 20%; height: 15px;\">$6,000<\/td>\n<td style=\"width: 20%; height: 15px;\">$900<\/td>\n<td style=\"width: 20%; height: 15px;\">Unfavorable<\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"width: 20%; height: 15px;\" scope=\"row\">Net Operating Income<\/th>\n<td style=\"width: 20%; height: 15px;\"><span style=\"text-decoration: underline;\"><strong>$1,900<\/strong><\/span><\/td>\n<td style=\"width: 20%; height: 15px;\"><span style=\"text-decoration: underline;\"><strong>$2,400<\/strong><\/span><\/td>\n<td style=\"width: 20%; height: 15px;\"><span style=\"text-decoration: underline;\"><strong>$500<\/strong><\/span><\/td>\n<td style=\"width: 20%; height: 15px;\">Favorable<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>So let\u2019s look at Simply Yoga. If their planning budget assumed 500 classes to be taken, but there were actually 600 classes taken in the time period, how would expenses react? Well, in this case, it looks like wages area based on a per class cost of $7 [latex]\\bigg(\\dfrac{\\$3500}{500}=\\$7[\/latex], and so does [latex]\\dfrac{\\$4200}{600}=\\$7\\big)[\/latex]. So if more classes are taken, it is a <strong>favorable<\/strong>\u00a0revenue variance, meaning the studio made more money, but an unfavorable wages and salaries variance, as they spent more on wages than budgeted. But was it a good thing to spend more? Yes! Even though expenses were higher, the net operating income is higher. So this is a good thing! This flexible budget allows us to make changes in the expense accounts as the number of classes taken changes.<\/p>\n<p>So why did rent and insurance not change? Remember back to our Hupana Running Company example. Those kinds of expenses are fixed, so it doesn\u2019t matter how many shoes we sell or classes are taken, they remain the same. This type of budgeting helps us to see how increases in revenue affect net profit.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_e04fb039-4dd6-481c-a7ed-af24817615aa\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/e04fb039-4dd6-481c-a7ed-af24817615aa?iframe_resize_id=assessment_practice_id_e04fb039-4dd6-481c-a7ed-af24817615aa\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-498\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Flexible Budget Report. <strong>Authored by<\/strong>: Freedom Learning Group. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":21,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Flexible Budget Report\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"a7ae5200-54d2-41b2-806d-969600751441, cceb6a42-c00c-4bc2-9a5e-b80714ffe941","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-498","chapter","type-chapter","status-publish","hentry"],"part":108,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/498","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":11,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/498\/revisions"}],"predecessor-version":[{"id":4117,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/498\/revisions\/4117"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/108"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/498\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=498"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=498"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=498"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=498"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}