The Wrap-up


· Victoria: Let me show you what I’ve got. [Victoria shows Rick the flexible budget performance report in  Exhibit 9–7 .] I simply used the cost formulas to update the budget to reflect the increase in client-visits you experienced in March. That allowed me to come up with a better benchmark for what the costs should have been.

· Rick: That’s what you labeled the “flexible budget based on 1,100 client-visits”?

· Victoria: That’s right. Your original budget was based on 1,000 client-visits, so it understated what some of the costs should have been when you actually served 1,100 customers.

· Rick: That’s clear enough. These spending variances aren’t quite as shocking as the variances on my first report.

· Victoria: Yes, but you still have an unfavorable variance of $2,360 for client gratuities.

· Rick: I know how that happened. In March there was a big Democratic Party fundraising dinner that I forgot about when I prepared the March budget. To fit all of our regular clients in, we had to push them through here pretty fast. Everyone still got top-rate service, but I felt bad about not being able to spend as much time with each customer. I wanted to give my customers a little extra something to compensate them for the less personal service, so I ordered a lot of flowers, which I gave away by the bunch.

· Victoria: With the prices you charge, Rick, I am sure the gesture was appreciated.

· Rick: One thing bothers me about the report. When we discussed my costs before, you called rent, liability insurance, and employee health insurance fixed costs. How can I have a variance for a fixed cost? Doesn’t fixed mean that it doesn’t change?

· Victoria: We call these costs fixed because they shouldn’t be affected by changes in the level of activity. However, that doesn’t mean that they can’t change for other reasons. Also, the use of the term fixed also suggests to people that the cost can’t be controlled, but that isn’t true. It is often easier to control fixed costs than variable costs. For example, it would be fairly easy for you to change your insurance bill by adjusting the amount of insurance you carry. It would be much more difficult for you to significantly reduce your spending on hairstyling supplies—a variable cost that is a necessary part of serving customers.

· Rick: I think I understand, but it is confusing.

· Victoria: Just remember that a cost is called variable if it is proportional to activity; it is called fixed if it does not depend on the level of activity. However, fixed costs can change for reasons unrelated to changes in the level of activity. And controllability has little to do with whether a cost is variable or fixed. Fixed costs are often more controllable than variable costs.

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