Budgeting
7.4 Prepare Flexible Budgets
Static versus Flexible Budgets
A static budget is one that is prepared based on a single level of output for a given period. The master budget, and all the budgets included in the master budget, are examples of static budgets. Actual results are compared to the static budget numbers as one means to evaluate company performance. However, this comparison may be like comparing apples to oranges because variable costs should follow production, which should follow sales. Thus, if sales differ from what is budgeted, then comparing actual costs to budgeted costs may not provide a clear indicator of how well the company is meeting its targets. A flexible budget created each period allows for a comparison of apples to apples because it will calculate budgeted costs based on the actual sales activity.
For example, Figure 7.24 shows a static quarterly budget for 1,500 trainers sold by Big Bad Bikes. The budget will change if there are more or fewer units sold.
| BIG BAD BIKES Static Quarterly Budget For Each Quarter |
|
| Units Sold | 1,500 |
| Sales Price | 70 |
| Sales | $105,000 |
| Cost of Goods Sold | |
| Direct Material | 6,000 |
| Direct Labor | 22,500 |
| Variable Manufacturing Overhead | 4,500 |
| Fixed Manufacturing Overhead | 29,000 |
| Total Cost of Goods Sold | 62,000 |
| Gross Profit | 43,000 |
| Variable Sales and Admin | 3,750 |
| Fixed Sales and Admin | 18,000 |
| Interest Expense | 0 |
| Income Taxes | 1,000 |
| Total Other Expenses | $22,750 |
| Net Income (Loss) | $20,250 |
Figure 7.24 Static Budget for Big Bad Bikes.