Learning Objective 08-P1: Prepare a flexible budget and interpret a flexible budget performance report. A flexible budget expresses variable costs in per unit terms so that it can be used to develop budgeted amounts for any volume level within the relevant range. Thus, managers compute budgeted amounts for evaluation after a period for the volume that actually occurred. To prepare a flexible budget, we express each variable cost as a constant amount per unit of sales (or as a percent of sales dollars). In contrast, the budgeted amount of each fixed cost is expressed as a total amount expected to occur at any sales volume within the relevant range. The flexible budget is then determined using these computations and amounts for fixed and variable costs at the expected sales volume.

 Learning Objective 08-P1: Prepare a flexible budget and interpret a flexible budget performance report.

A flexible budget expresses variable costs in per unit terms so that it can be used to develop budgeted amounts for any volume level within the relevant range. Thus, managers compute budgeted amounts for evaluation after a period for the volume that actually occurred. To prepare a flexible budget, we express each variable cost as a constant amount per unit of sales (or as a percent of sales dollars). In contrast, the budgeted amount of each fixed cost is expressed as a total amount expected to occur at any sales volume within the relevant range. The flexible budget is then determined using these computations and amounts for fixed and variable costs at the expected sales volume.

 Knowledge Check 01
 
Select the correct answer from the drop-down menu.
 


Explanation
Knowledge Check 01
 
Item #1:
A fixed budget based on one predicted amount of sales.
 
Item #2:
A flexible budget based on more than one amount of sales.

 

Mead Corporation has prepared a fixed budget based on 6,000 units. Their budgeted per unit selling price is $100, variable costs are $75 per unit, and fixed costs are $20,000. If actual sales activity was 5,000 units with revenue of $550,000, what is the sales variance shown on a fixed budget performance report?
 
multiple choice
$50,000 Unfavorable Correct
$50,000
$50,000 Favorable

Explanation
Knowledge Check 01
 
Sales variance = Actual sales revenue of $550,000 − Budgeted sales of $600,000 (or 6,000 units × $100 per unit) = $50,000 U. The unfavorable variance (indicated with an F or U) results because the fixed budget was based on revenue at 6,000 units, but actual sales were only 5,000 units. 

Acme Manufacturing Company prepared a fixed budget based on the expected sales of 160,000 units. That fixed budget included variable costs totaling $800,000 and fixed costs totaling $240,000. If the company instead uses flexible budgeting and actually sells 200,000 units during the year, what are the amounts that will be included in its flexible budget performance report for total variable costs and total fixed costs?
 
multiple choice
$800,000 and $300,000
$800,000 and $240,000
$1,000,000 and $300,000
$1,000,000 and $240,000 Correct

Explanation
Knowledge Check 01
 
Budgeted variable cost per unit = Total budgeted variable costs of $800,000 ÷ Total budgeted sales of 160,000 units = $5 per unit
Total variable costs budgeted at an activity level of 200,000 units = Budgeted variable cost per unit of $5 × Total budgeted sales of 200,000 units = $1,000,000
The budget for fixed costs will remain unchanged at $240,000.

Thanks