Accounting for Managers: Interpreting accounting information for decision-making

226 ACCOUNTING FOR MANAGERS

Table 15.1 Actual v. budget financial report

Budget for

this period

Actual for

this period

Budget for the

year to date

Actual for the

year to date

Variance

Materials 40,000 45,000 100,000 96,000 4,000 Fav
Labour 21,000 19,000 30,000 32,000 2,000 Adv
Energy 9,000 7,000 40,000 38,000 2,000 Fav
Other costs 10,000 2,500 50,000 55,000 5,000 Adv

Total 80,000 73,500 220,000 221,000 1,000 Adv

and the year to date, which shows an overspend of £1,000. The weakness of
traditional management reports for budgetary control is that the business may
not be comparing like with like. For example, if the business volume is lower
than budgeted, then it follows that any variable costs should (in total) be lower
than budgeted. Conversely, if business volume is higher than budget, variable
costs should (in total) be higher than budget. In many management reports, the
distinction between variable and fixed costs (see Chapter 8) is not made and it
becomes very difficult to compare costs incurred at one level of activity with
budgeted costs at a different level of activity and to make judgements about
managerial performance.

Flexible budgeting......................................

Flexible budgets provide a better basis for investigating variances than the original
budget, because the volume of production may differ from that planned. If the
actual activity level is different to that budgeted, comparing revenue and/or costs
at different (actual and budget) levels of activity will produce meaningless figures.
Aflexible budgetis a budget that isflexed, that is standard costs per unit are
applied to the actual level of business activity. It makes little sense to compare
the budgeted costs of producing (say) 40,000 units with the costs incurred in
producing 35,000 units. Variance analysis is then carried out between the flexed
budget costs and actual costs.
Flexible budgets take into account variations in the volume of activity. Using
the above example, costs are budgeted at £2 per unit for 40,000 units but actual
costs are £2.10 for 35,000 units. A standard actual versus budget report will show:

Budget Actual Variance

£80,000 £73,500 £6,500 Favourable

40,000 @ £2 35,000 @ £2.10

The favourable variance disguises the fact that fewer units were produced. A
flexible budget adjusts the original budget to the actual level of activity. The