Loading acctg211..

Static Budgets

This lesson will take a closer look at two budget systems:

static budgeting and
flexible budgeting.

As the previous lesson mentioned, the static budget is

completed prior to the forecasting of budget periods and
fixed for the entire period covered by the budget.

When using a static budget, you would not change the original budget even if actual sales volume differs significantly from the documented expectations. The static budget is the most common budgetary system since it is relatively simple to implement.

In this lesson, you will prepare a static budget performance report, in which you will compare the original budget with the actual results of operations using the example from the last lesson, The Unknown Comic, Inc.. In Lesson 13, you prepared the master budget for the year ended December 31, 2017, based on an estimate of 6,500 units sold for the year. At the end of 2017, you can compare the budgeted amounts with the actual results of company operations. The static budget performance report for The Unknown Comic is shown below:

The Unknown Comic, Inc.
Static Budget Performance Report
for Year Ended December 31, 2017
-	Actual	Budget	Variance	-
-	6,300 units	6,500 units	200 units	U
Revenue	-	-	-	-
Sales	$214,200	$195,000	$19,200	F
-	-	-	-	-
Variable costs	-	-	-	-
Direct materials	$22,785	$19,200	$3,585	U
Direct labor	$39,060	$43,520	$4,460	F
Factory overhead	$7,595	$7,680	$85	F
Total manufacturing costs	$69,440	$70,400	$960	F
Variable selling expenses	$10,710	$9,750	$960	U
Total variable costs	$80,150	$80,150	$0	F
-	-	-	-	-
Fixed factory overhead	$8,250	$8,600	$350	F
Fixed selling and administrative expenses	$70,850	$66,750	$4,100	U
Total fixed costs	$79,100	$75,350	$3,750	U
-	-	-	-	-
Total expenses	$159,250	$155,500	$3,750	U
-	-	-	-	-
Operating income	$54,950	$39,500	$15,450	F

The variance column shows the difference between the actual results of operations and the budgeted amounts. All numbers in this column are shown as positive numbers; you simply take the larger of the two numbers (actual or budget) and subtract the smaller number to get the variance. Instead of using positive and negative numbers, you would use an F for favorable and a U for unfavorable.

So, what do favorable and unfavorable mean? It depends on the line item you are looking at. With respect to sales revenue, the company expected to sell $195,000 worth of merchandise, but actually sold $214,200. It sold $19,200 more than expected. This is a good thing. You would denote that with an F for a favorable outcome. If the company sold less than expected, it would be unfavorable. Take a look at direct materials: The company expected to spend $19,200, but ended up spending $22,785. Not so good—it spent $3,585 more than was budgeted. You would denote this with a U for an unfavorable outcome.

You can use the static budget performance report to compare expected performance with actual performance on a line-item-by-line-item basis.

What about the unit sales? The static budget was based on 6,500 expected sales in units, but the company only sold 6,300 units. You would will address the change in sales volume using a flexible budget.

Please use a modern browser to view our website correctly. Update my browser now