Static Budgets and Performance Reports

1. Hmm! Comparingstatic budgets withactual costs is likecomparing applesand oranges. Static Budgets and Performance Reports Static budgetsare prepared fora single, plannedlevelof activity. Performance evaluation is difficult when actual activity differs from the planned level of activity.

2. Static Budgets and Performance Reports CheeseCo Since cost variances are favourable, havewe done a good job controlling costs?

3. I don’t think Ican answer thequestion usinga static budget. Actual activity is belowbudgeted activity. So, shouldn’t variable costsbe lower if actual activityis lower? Static Budgets and Performance Reports

4. Static Budgets and Performance Reports • The relevant question is . . . “How much of the favourable cost variance is due to lower activity, and how much is due to good cost control?” • To answer the question,we mustthe budget to theactual level of activity.

5. May be prepared for any activity level in the relevant range. Show costs that should have beenincurred at the actual level ofactivity, enabling “apples to apples”cost comparisons. Reveal variances related tocost control. Improve performance evaluation. Let’s look at CheeseCo. Flexible Budgets

6. Flexible budget is prepared for thesame activity level (8,000 hours) as actually achieved. Flexible Budget Performance Report CheeseCo

7. Activity Cost control This $15,000F variance is due to lower activity. This $3,350Uvariance is dueto poor cost control. Flexible Budget Performance Report Overhead Variance Analysis