Page 185 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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This process takes longer and involves more back-and-forth,
trial-and-error manipulation of the numbers. But it will usually
result in a more equitable budget that’s easier for subordinates
to buy into, rather than the alternative—acceptance of the edict
from above, all the while holding the quiet belief that “it will take
a lot of luck to make these numbers.”
Flexible Budgets—Whatever Happens, We’ve Got a
Budget for It
One of the most useful tools in the manufacturing environment,
and in many other kinds of companies as well, is the flexible
budget. This tool is an extension of the classic budgeting
methodology that is most valuable when these two statements
are both true:
1. The company expects or may experience wide variations
in levels of activity within some area of the company, such
as sales.
2. Many of the costs vary directly with those levels of activi-
ty, e.g., they are direct costs tied to sales, and the budget
controls for these costs would be marginally useless if
activity levels were significantly different from those
in the budget.
Flexible budget A set of
In this situation, it’s
projections of revenue and
expenses at various levels wise to develop a flexible
of production or sales.A flexible budget, in which directly
budget, because it’s based upon differ- related costs are budgeted
ent levels of activity, is very useful for for various levels of activi-
comparing actual costs experienced ty and the budget used for
with the costs allowed for the activity comparison with actual
level achieved.A series of budgets can results is the budget that’s
be readily developed to fit any activity
level. based on the actual activi-
ty levels achieved.
How does a flexible budget work? Let’s assume The Wonder
Widget Company is projecting production of its WW-1000 at