Overview

Learning objectives

After studying this chapter, you should have developed an appreciation of:

1. The value of using flexible budgets

2. A systematic approach that can be used when preparing variance analyses

3. The insights resulting from variance analyses

4. The nature and merits of benchmarking.

Introduction

This chapter builds on some of the budget and responsibility accounting issues introduced in the previous chapter. First, we examine flexible budgeting, a technique that represents a slight refinement of the static budgeting approach described in the previous chapter. In a static budgeting system, a budget is rigid in the sense that it is not modified once the actual volume of sales is known. While this approach is used extensively, some managers find it helpful to flex budgets up or down in line with the actual volume of sales achieved. Failure to accurately predict the volume of sales is a major factor causing many significant differences between the static budget and actual performance. Under flexible budgeting, however, the effect of a hotel selling more or less than was originally projected is excluded from differences between the actual and budgeted performance. Exclusion of this factor is significant because, by definition, managers in cost centres exert little influence on sales volumes. If managers in cost centres cannot affect sales, why should the effect of selling more than anticipated be included in a variance used to gauge their performance?

A second technique introduced in this chapter is variance analysis. Variance is the accounting...