How the Flex Budget Works This simple example is for a small business selling a telephone survey service. The only costs the company incurs are salaries, benefits, rent and telephone expenses. Budget assumptions: Telephone cost Sales volume per staff member Average salary Benefits cost Rent $ $ $ $ 0.05 per sales dollar 100,000 30,000 10% of salary cost 8,000 per month (fixed) Once the fiscal year starts we can now compare the actual results to the budget. Flex Budget Number of employees Sales Salaries Benefits Telephone expense Rent Total expenses Profit $ $ Actual 12.00 1,150,000 364,000 40,000 63,250 8,000 475,250 674,750 $ $ Budget 11.50 1,150,000 345,000 34,500 57,500 8,000 445,000 705,000 $ $ Variance 0.50 (19,000) (5,500) (5,750) (30,250) (30,250) $ $ $ $ $ $ The flex budget is created using the budget assumptions from above but replacing sales volume with the actual sales. We can easily see that our costs are higher than what we budgeted. We can now spend the time understanding if there are legitimate reasons for this and whether we need to be concerned with cost control. The resulting budget based on these assumptions and sales of $1,000,000 would be: Budget 10.00 $ $ 1,000,000 300,000 30,000 50,000 8,000 388,000 612,000 Number of employees Sales Salaries Benefits Telephone expense Rent Total expenses Budgeted Profit $ $ Static Budget Number of employees Sales Salaries Benefits Telephone expense Rent Total expenses Profit $ $ Actual 12.00 1,150,000 364,000 40,000 63,250 8,000 475,250 674,750 $ $ Budget 10.00 1,000,000 300,000 30,000 50,000 8,000 388,000 612,000 $ $ Variance 2.00 150,000 (64,000) (10,000) (13,250) (87,250) 62,750 $ $ $ $ $ $ Using the static budget, if there are any differences in costs the reasons are being masked because of the sales volume difference. It becomes more complicated to analyze what is happening and getting to the root of cost issues would take a great deal of additional analysis work. Using the static budget gives us a false sense of where the business stands by showing a $62k gain in profit. Seeing we are ahead of budget might make us complacent and lull us into a false sense of security.
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