Flexible Budget Performance Report
A flexible budget performance report is a document that compares the actual results of a business to the results of the flexible budget for a specific period. It’s used as a tool for performance evaluation, helping managers to understand where the company performed better or worse than expected, given the actual level of activity during the period.
The report typically includes the following components:
- Actual Results: These are the actual revenues and costs experienced during the period.
- Flexible Budget Amounts: These are the budgeted revenues and costs, adjusted for the actual level of activity or output.
- Variances: This is the difference between the actual results and the flexible budget amounts. Variances can be favorable (if the actual results are better than the budgeted amounts, such as higher revenue or lower costs) or unfavorable (if the actual results are worse than the budgeted amounts, such as lower revenue or higher costs).
By comparing the actual results to the flexible budget amounts, the report allows managers to see how well they controlled costs and generated revenue given the actual level of activity. This is more meaningful than comparing actual results to a static budget, which doesn’t take into account changes in activity levels.
The flexible budget performance report is an effective tool for management to understand cost behaviors, control costs, and make informed business decisions.
Example of a Flexible Budget Performance Report
Let’s consider a company that manufactures widgets. The company uses a flexible budget based on the number of units produced. It has the following budgeted costs per unit:
- Direct Materials: $10
- Direct Labor: $5
- Variable Overhead: $2
- Fixed Overhead: $8,000 per month
For the month of June, the company planned to produce 1,000 units but actually produced 1,200 units. Here is how a flexible budget performance report might look for that month:
| Budgeted (1,000 units) | Actual (1,200 units) | Variance | |
|---|---|---|---|
| Direct Materials | $10,000 ($10 x 1,000) | $11,800 ($10 x 1,200 – assumed for this example) | $1,800 Unfavorable |
| Direct Labor | $5,000 ($5 x 1,000) | $5,600 ($5 x 1,200 – assumed for this example) | $600 Unfavorable |
| Variable Overhead | $2,000 ($2 x 1,000) | $2,400 ($2 x 1,200 – assumed for this example) | $400 Unfavorable |
| Fixed Overhead | $8,000 | $8,000 (fixed amount) | $0 (No Variance) |
| Total Costs | $25,000 | $27,800 | $2,800 Unfavorable |
The variances shown in the table tell the company that it spent more on direct materials, direct labor, and variable overhead than it would have expected given the level of output. These are unfavorable variances because costs are higher than expected.
Note: The Fixed Overhead is the same in the budget and actual results because it’s a fixed cost that doesn’t change with the level of output.
This report allows management to understand where costs differed from what would have been expected given the actual level of output, and investigate why these variances occurred. In this case, they might look into whether materials prices have increased, if there was more labor required per unit than expected, or if variable overhead costs were higher for some reason.
