Flexible budget performance report
/What is a Flexible Budget Performance Report?
A flexible budget performance report is used to compare actual results for a period to the budgeted results generated by a flexible budget. This report varies from a traditional budget versus actual report, in that the actual sales figure is plugged into the budget model, which then uses formulas to alter the budgeted expense amounts. This approach results in budgeted expenses that are significantly more relevant to the actual performance that an organization experiences.
If the flexible budget model is designed to adjust to actual sales inputs in a reasonable manner, then the resulting performance report should closely align with actual expenses. This makes it easier to spot anomalies in the report, which should be rare. Management can then focus on the significant variances to see if any actions should be taken to ensure that actual results remain close to expectations.
The flexible budget model and its related reports are a significant improvement over the more common static budget model, where there is only one version of a budget, and that budget does not change. When a static model is the basis of comparison, the likely outcome is large favorable variances or unfavorable variances for many line items, since the static model may have been based on a sales level that is no longer relevant to actual conditions.
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Example of a Flexible Budget Performance Report
Quest Adventure Gear has always budgeted for sales of its polycarbonate climbing helmets using a static budget, but sales have differed markedly from expectations, resulting in large variances in its production budget. For the new budget year, Quest is experimenting with a flexible budget. This budget is divided into variable cost and fixed cost components, with the variable costs being tied to the number of unit sales of the helmet. The resulting budget is shown in the following table, which notes both budgeted and actual results for the first month of the budget period.
The budget model multiplies the $21.50 budgeted unit cost of the helmet components by the 1,500 actual units sold to arrive at budgeted variable costs for the month of $32,250. All other costs shown in the budget are fixed.