The flexible budget uses the same selling price and cost assumptions as in a original budget. Variable and fixed costs do not change categories. The variable amounts are recalculated using the actual level of activity, which in the case of the income statement is sales units. The important thing to remember in preparing a flexible budget is that if an amount, cost or revenue, was variable when the original budget was prepared, that amount is still variable and will need to be recalculated when preparing a flexible budget. If, however, the cost was ...view middle of the document...
If cost was identified as a fixed cost, and no changes are made in the budgeted amount when the flexible budget is prepared. Differences may occur in fixed expenses, but they are not related to changes in activity within the relevant range.
When preparing budget reports, it is important to include in the report the items the manager can control. If a manager is only responsible for a department's costs, to include all the manufacturing costs or net income for the company would not result in a fair evaluation of the manager's performance. If, however, the manager is the Chief Executive Officer, the entire income statement should be used in evaluating performance.
Companies use the cost volume profit analysis to determine what changes in costs and volume affect the company’s net income. Cost volume profit analysis requires that all the company's costs, including manufacturing, selling, and administrative costs, be identified as variable or fixed.
There are several assumptions made when using the cost volume profit analysis.
* Sales price per unit is constant.
* Variable costs per unit are constant.
* Total fixed costs are constant.
* Everything produced is sold.
* Costs are only affected because activity changes.
* If a company sells more than one product, they are sold in the same mix.