How can a flexible budget answer questions about what variances are saying?
A flexible budget is a budgeting approach that adjusts for changes in activity levels or production volume. It provides a framework to evaluate variances by comparing actual performance against the budgeted performance for different activity levels.
To answer questions about what variances are saying using a flexible budget, you can follow these steps:
1. Understand the concept of variances: Variances are the differences between actual performance and budgeted performance. They indicate the deviation from the expected results and help identify areas where performance is better or worse than anticipated.
2. Prepare a flexible budget: Start by creating a flexible budget that incorporates various levels of activity or production volume. This involves estimating the costs and revenues associated with different activity levels to form a range of expected budget figures.
3. Compare actual results to the flexible budget: Collect actual data on costs and revenues and compare them to the corresponding budget figures for the same activity level. Calculate the variances by subtracting the budgeted amount from the actual amount.
4. Analyze the variances: Once you have calculated the variances, analyze them to understand their implications. Positive variances indicate that actual performance is better than expected, while negative variances suggest that actual performance falls short of expectations.
5. Identify the causes of variances: Dig deeper into each variance to determine its root causes. This may involve investigating factors such as changes in pricing, volume, efficiency, or utilization. Identifying the causes of variances helps management understand what factors are contributing to deviations from the budget.
6. Take appropriate action: Based on the analysis of variances and their causes, management can take appropriate actions to address any unfavorable variances and capitalize on favorable variances. This may involve adjusting production processes, changing pricing strategies, implementing cost-saving measures, or reallocating resources.
In summary, a flexible budget allows you to evaluate the performance of your organization at different activity levels. By analyzing variances between actual results and the flexible budget, you can gain insights into performance deviations and take action accordingly. This helps in understanding what the variances are saying and enables informed decision-making.