This document provides an overview of flexible budgets and performance analysis. It discusses the variance analysis cycle and how flexible budgets improve performance evaluation by enabling more accurate comparisons. The document outlines how to prepare a flexible budget, identify deficiencies in static planning budgets, and calculate activity, revenue, and spending variances. It also shows how to create a performance report combining these variances. The document demonstrates these concepts using an example of a hairstyling salon. It notes how flexible budgets can incorporate multiple cost drivers and discusses applying these techniques to non-profit organizations and cost centers.

1. Flexible Budgets and Performance Analysis
Chapter 9
Instructor: Ma’am Nadia Anjum (Lecturer Finance)
Presented by: Suraksha Sachdev (BBA-VI)

2. Agenda
 The variance analysis cycle
 Prepare a flexible budget
 Deficiencies of the static planning budget
 Activity variances
 Revenue and spending variances
 Prepare a performance report that combines activity variances with revenue and spending variances
 Performance report in non-profit organizations
 Performance reports in cost centers
 Prepare a flexible budge with more than one cost driver
 A performance report with more than one cost drivers that combines activity variances with revenue and
spending variances
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3. The Variance Analysis Cycle
 Companies use the variance cycle to evaluate and
improve performance.
 Management by exception is used in conjunction
with variance analysis to help managers focus on
the most important issues and take corrective
actions as necessary.
 Management by exception is a management
approach that compares actual results to a budget,
identifying significant deviations as exceptions
that require further investigation.
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4. Prepare a Flexible Budget
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5. Characteristics of a Flexible Budget
 Compare actual costs to the costs that
should have been incurred at the actual
level of activity during the period,
rather than to a static planning budget.
 Provides a better basis for decision-
making by considering the effect of
changes in activity levels.
 Facilitates effective cost control by
providing a more accurate and realistic
budget.
 Increases the accuracy of financial
forecasts by considering the effect of
changes in volume or activity on costs.
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 Enabling more accurate
comparison.
 Better analysis.
 Setting realistic targets.
Flexible budgets
improve
performance
evaluation

6. Deficiencies of the Static Planning Budget
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Rick’s Hairstyling, an upscale hairstyling salon has been attempting to get
better control of his revenues and costs. At the end of February, Rick
prepared the March budget that the number of customers served in a month
(also known as the number of client-visits) is the best way to measure the
overall level of activity in his salon.

7. Deficiencies of the Static Planning Budget
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Since these variances are
unfavorable, has Rick done a
poor job controlling costs?
Since these variances are
favorable, has rick done a
good job controlling
costs?

8. Deficiencies of the Static Planning Budget
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I don't think I
can answer the
question using
a static budget.

9. Deficiencies of the Static Planning Budget
The relevant question is how much of the cost variances are due to higher
activity and how much are due to cost control?
To answer the question of cost variances due to higher activity and cost control,
it is necessary to adjust the budget to reflect the actual level of activity.
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10. How a Flexible Budgets Works
Lets Prepare a Flexible Budget for Rack’s Hairstyling
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11. Preparing a Flexible Budget
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12. Prepare a report showing activity variances
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13. Activity Variances
The difference between
the budget amounts are
called activity variances.
Planning budget
revenue and
expenses
Flexible budget
revenue and
expenses
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14. Activity Variances
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15. Activity Variances
The net operating income increased by more than 10% despite a 10%
increase in activity and revenue due to the presence of fixed costs. The
fixed costs remain constant regardless of the level of activity or
revenue, which means that as the company grows and generates more
revenue, the fixed costs are spread over a larger base, resulting in a
higher profit margin.
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16. Prepare a report showing revenue and spending variances
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17. Revenue and Spending Variances
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The difference is a
revenue variance.
Flexible
budget
revenue
Actual
revenue
The difference is a
spending variance.
Flexible budget
cost Actual cost

18. Revenue and Spending Variances
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Prepare a performance report that combines activity
variances and revenue and spending variances.

20. A Performance Report Combining Activity Variances with
Revenue and Spending Variances
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21. Performance Report in Non-Profit Organizations
Nonprofit organizations usually receive a significant amount of
funding from sources other than sales. The revenue in governmental
and nonprofit organizations may consist of both fixed and variable
elements.
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State Funding
Tuition and Fees
Donations
Endowments

22. Performance Reports in Cost Centers
Performance reports are frequently
prepared for cost centers within
organizations that do not generate
external revenue. They provide
valuable information to department
managers responsible for controlling
and managing costs within their
respective areas. These departments,
known as cost centers, are evaluated
based on their ability to effectively
manage and control costs.
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23. Prepare a flexible budget with more than one cost driver
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24. Flexible Budgets with Multiple Cost Drivers
 A single cost driver may not capture all the factors that influence costs. Utilizing multiple cost
drivers enables a more comprehensive understanding of the various elements that contribute to
overall costs in the organization.
 The cost formula used to prepare a flexible budget can be adjusted to recognize multiple cost
drivers.
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25. Flexible Budgets with Multiple Cost Drivers
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26. A Performance Report With More Than One Cost Drivers That
Combines Activity Variances with Revenue and Spending Variances
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End of Chapter 9

28. About Kandhkot Campus
Sukkur IBA University – Kandhkot Campus has been established with a goal to offer access to quality
education to the people of underprivileged areas of Pakistan. With its geographical importance in Kandhkot
city, the campus provides easy access to the students hailing from south Punjab, northern Sindh, and south-
east Balochistan. The campus offers admission in various programs including undergraduate, foundation
semester, summer program, and short courses.
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29. About Kandhkot Campus
Vision
To become the world-class university in the fields of Management Sciences, Information Technology and
Education.
Mission
To contribute and serve the community by imparting knowledge through innovative teaching methods and
cutting-edge curriculum that fulfills industry and society needs. We aim to maintain merit, quality and
excellence in academic and administrative processes using technology and ethical values.
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