7 10 The Performance Report Managerial Accounting

At the beginning of January, Amara generated the actual income statement showing the actual revenue earned and expenses incurred. The planning budget income statement and the actual income statement are provided in Exhibit 7-4. Vera, a self-trained chef, opened a new restaurant called Vera’s Vittles in a historic, inner-city neighborhood. Her menu showcases classic Southern dishes passed down from her great grandmother. Since opening approximately two years ago, the restaurant has received rave local reviews and was recently named the best Southern restaurant in the city.

Practice Video Problem 7-1:  Preparing a planning budget LO2

• By following these best practices, businesses can ensure their flexible budget performance reports provide meaningful insights for better financial control and strategic decision-making.
• This, in turn, leads to improved financial control and forecasting accuracy within the retail environment.
• The explanation of variances in a Flexible Budget Performance Report involves identifying favorable and unfavorable variances, providing insights into the effectiveness of previous budgeting decisions.
• And finally, make sure to foster a culture of continuous improvement fueled by the insights from these reports.
• The reason is that the actual quantity sold or produced is rarely the same as the estimated quantity projected in the planning budget.
• For example, if the actual quantity sold at the end of the period is higher than the budgeted amount, it makes sense that both actual revenue and expenses will be higher than the budgeted amounts.

Lastly, profit variance reflects the overall impact of cost and revenue variances Bookkeeping for Painters on profitability, allowing management to make informed decisions for future planning and control. Flexible Budget Aflexible budget is a budget prepared using theACTUAL level of production instead of the budgeted activity. Thedifference between actual costs incurred and the flexible budgetamount for that same level of operations is called a budgetvariance. Budget variances can indicate adepartment’s or company’s degree of efficiency, since they emergefrom a comparison of what was with what should have been.

Practice Video Problem 7-3: Prepare a flexible budget performance evaluation report and analyze the variances LOs 5,6,7

Flexible budgets let you course-correct on the fly as operating conditions change. Your planning and forecasting can bend and flex to match the dynamic markets and conditions you face. Instead of just looking at actual results versus a static, outdated budget, you’re comparing to flexed numbers that match reality. This pinpoints exactly where you’re excelling and where there’s room for improvement.

Q. What does a flexible budget performance report indicate?

The flexible budget performance report would place a U next to this total to indicate it is an unfavorable variance. Performance areas that operate better than originally estimated are marked with an F for favorable variance. A flexible budget performance report takes into account changes in activity levels, while a static budget performance report is based on a single set of budgeted performance budget levels.

• This report aids management in evaluating cost control measures, facilitating informed decision-making and strategic planning.
• This process involves recalculating the budgeted amounts to reflect the actual level of activity achieved, thereby allowing for a more accurate comparison with the actual results.
• A flexible budget performance report takes into account changes in activity levels, while a static budget performance report is based on a single set of budgeted levels.
• Calculating variances involves assessing different types such as cost variance, revenue variance, and profit variance, providing insights into the financial performance outcomes.
• By comparing actual expenses with the flexible budget allowance, areas of over or under spending can be identified, allowing for timely corrective actions.
• Shipping is a variable cost since it is always $4 per unit, but the total depends on how many units are sold.

The cost formula for shipping would be $4 per unit sold, which is noted as $4Q, where Q equals the activity driver, quantity sold in this case. Planning budgets are useful in Certified Public Accountant the planning and controlling phases of operations but not as useful for performance evaluation. During the planning phase, these budgets are used by management to help plan operations including activities such as scheduling production, purchasing materials, and making capital investments.