Some Common Errors

Some Common Errors


Understand common errors made in preparing performance reports based on budgets and actual results.

We started this chapter by discussing the need for managers to understand the difference between what was expected to happen—formalized by the planning budget—and what actually happened. To meet this need, we developed a flexible budget that allowed us to isolate activity variances and revenue and spending variances. Unfortunately, this approach is not always followed in practice—resulting in misleading and difficult-to-interpret reports. The most common errors in preparing performance reports are to implicitly assume that all costs are fixed or to implicitly assume that all costs are variable. These erroneous assumptions lead to inaccurate benchmarks and incorrect variances.

We have already discussed one of these errors—assuming that all costs are fixed. This is the error that is made when static planning budget costs are compared to actual costs without any adjustment for the actual level of activity. Such a comparison appeared in  Exhibit 9–3 . For convenience, the comparison of budgeted to actual revenues and costs is repeated in  Exhibit 9–9 . Looking at that exhibit, note that the budgeted cost of hairstyling supplies of $1,500 is directly compared to the actual cost of $1,620, resulting in an unfavorable variance of $120. But this comparison only makes sense if the cost of hairstyling supplies is fixed. If the cost of hairstyling supplies isn’t fixed (and indeed it is not), one would expect the cost to go up because of the increase in activity over the budget. Comparing static planning budget costs to actual costs only makes sense if the cost is fixed. If the cost isn’t fixed, it needs to be adjusted for any change in activity that occurs during the period.

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