Flexible Budget Based on Actual Activity

EXHIBIT 9–4 Flexible Budget Based on Actual Activity


We can see from the flexible budget that the net operating income in March should have been $30,510, but recall from  Exhibit 9–2  that the net operating income was actually only $21,230. The results are not as good as we thought. Why? We will answer that question shortly.

To summarize to this point, Rick had budgeted for a profit of $16,800. The actual profit was quite a bit higher—$21,230. However, given the amount of business in March, the profit should have been even higher—$30,510. What are the causes of these discrepancies? Rick would certainly like to build on the positive factors, while working to reduce the negative factors. But what are they?

Flexible Budget Variances

To answer Rick’s questions concerning the discrepancies between budgeted and actual costs, we will need to break down the variances shown in  Exhibit 9–3  into two types of variances—activity variances and revenue and spending variances. We do that in the next two sections.

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