Problem: 9-21

Question 9.2

What is a flexible budget and how does it differ from a static planning budget?

Flexible Budget: A flexible budget is a dynamic financial plan that adjusts based on varying levels of activity or production. It provides estimates of revenues and costs for different activity levels within a specific period.

Key features:

Adaptability: Unlike a static budget, a flexible budget changes as the volume of activity changes. For example, if production increases or decreases, the flexible budget adjusts accordingly.

Comparison with Actuals: The flexible budget allows management to compare actual revenues and costs against the budgeted amounts at different activity levels. This comparison helps identify areas of variance and informs decision-making.

Cost Control: By accommodating changes in activity, the flexible budget enables better cost control. Managers can assess performance more accurately and take corrective actions as needed.

Static Planning Budget:

A static planning budget (also known as a fixed budget) remains unchanged regardless of variations in activity levels. It is set at the beginning of a period and does not adjust during that period.

Key features:

Inflexibility: Unlike a flexible budget, a static planning budget does not depend on the level of activity. It remains fixed, even if production or sales volumes fluctuate.

Simplicity: Static budgets are straightforward to create because they remain constant. However, their rigidity can limit their usefulness in dynamic business environments.

Benchmarking: Static budgets serve as benchmarks for evaluating actual performance. Any deviations from the budgeted amounts can indicate areas that need attention.

Summary: In summary, a flexible budget adapts to changing activity levels, while a static planning budget remains fixed regardless of variations. Both types of budgets have their advantages and are useful for different purposes in financial planning and control.

Question 9.3

What are some of the possible reasons that actual results may differ from what had been budgeted at the beginning of a period?

9.9

What does a flexible budget performance report do that a simple comparison of budgeted to actual results does not do?

The flexible budget performance report cleanly separates the differences between the static planning budget and the actual results that are due to changes in activity (the activity variances) from the differences that are due to changes in prices and the effectiveness with which resources are managed (the revenue and spending variances). The flexible budget is interposed between the static planning budget and actual results. Revenue variance is the difference between how the revenues should have been given the actual level of activity and the actual revenue for the period. A revenue variance is easy to interpret; a favourable revenue variance occurs because the revenue is greater than expected for the actual level of activity. An unfavourable revenue variance occurs because the revenue is less than expected for the actual level of activity. Actual results can differ for many reasons; the differences are usually due to changes in the level of activity, changes in prices, and changes in how effectively resources are managed.

Exercise 9.4 Prepare a flexible budget performance report.

Vulcan flyovers offer scenic overflights of mount St. Helens, the volcano in Washington State that explosively erupted in 1982. Data concerning the company's operations in July appear below:

Vulcan flyovers Operating data For the month ended July 31
	Actual results	Flexible budget	Planning budget
Flights (q)	48	48	50
Revenue ($320.00q)	13,650	15,360	16,000
Wages and salaries ($4,000+$82.00q)	8,430	7,930	8,100
Fuel ($23.00q)	1,260	1,104	1,150
Airport fees ($650+$38.00q)	2,350	2,474	2,550
Aircraft depreciation ($7.00q)	336	336	250
Office expenses ($190+$2.00q)	460	286	290
Total expense	12,836	12,136	12,440
Net operating income	$814	$3,224	$3,560

The company measures its activity in terms of flights. Customers can buy individual tickets for overflights or hire an entire plane for an overflight at a discount.

Required:

1. Using Exhibit 9-8 as your guide, prepare a flexible budget performance report for July that includes revenue and spending variances and activity variances.

2. which of the variances should be of concern to management? Explain.