Saturday, November 5, 2011

Actual Performance vs. Planning Budget

The planning or static budget is an educated guess as to what the actual performance will be during the budget period. However, rarely does actual performance match the actual planning budget that was created at the beginning of the year. Major differences between the planning budget and actual performance are mainly caused by two different things: differences in activity level and differences in spending.

Between a planning budget and actual performance, a flexible budget can be constructed based on the actual level of activity and the revenue and cost formulas from the planning budget. The differences between the static and flexible budgets are due to the difference between planned (static) activity and actual (flexible) activity.

These differences are labeled activity variances and differences between the flexible budget and the actual performance are mainly due to differences in selling price per unit for revenue and spending per unit for expenses. These differences are labeled revenue and spending variances.

Overhead costs and selling and administrative expenses, spending variances result from both the cost per item and the number of items used.

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