Prepare A Flexible Budget And Compute Sales And Variable

Prepare a flexible budget and compute the sales and variable cost volume variances based on a comparison between the master budget and the flexible budget

The Rundle Management Association hosted its annual public relations luncheon in April of Year 2, with an operating budget allocation of $27,408. The original budget was based on an anticipated attendance of 1,520 individuals, a meal cost of $13.00 per person, mailing 3,600 invitations at $0.68 each, and fixed costs for the facility, printing, decorations, the speaker’s gift, and publicity. Actual results exceeded expectations, with 1,740 attendees, higher meal costs of $13.70 per person, mailing 4,600 invitations, and incurring a larger facility charge. The variances between budgeted and actual figures require analysis through the preparation of a flexible budget, volume variance calculations, and a variance comparison between the flexible budget and actual results. This report aims to analyze these variances to determine their favorable or unfavorable nature and provide insights into the cost and operational control of the event.

Introduction

Budgeting and variance analysis are fundamental components of managerial accounting as they provide essential information for effective control and decision-making. In a typical event such as the Rundle Management Association’s annual luncheon, budgets establish expectations for costs and revenues, while variances alert management to deviations that may require corrective actions. Specifically, flexible budgeting allows organizations to adjust the static master budget to actual activity levels, facilitating a more accurate comparison. The current scenario involves comparing the master budget, the flexible budget based on actual attendance, and the actual expenses incurred. This analysis sheds light on cost control effectiveness and operational efficiency.

Master Budget and Actual Results Overview

The master budget for the luncheon was based on the following assumptions:

  • Attendance of 1,520 individuals
  • Meal cost of $13 per person
  • Mailing 3,600 invitations at $0.68 each
  • Facility charge of $2,200 for up to 1,700 participants
  • Fixed costs for printing, decorations, speaker’s gift, and publicity totaling $3,000

Based on these assumptions, the total estimated expenses matched the allocated budget of $27,408, resulting in a balanced projected surplus/deficit.

Actual results indicated higher attendance (1,740), increased meal costs ($13.70 per person), more invitations mailed (4,600), and a higher facility fee ($2,700). The total actual expenditure surpassed the budget by $5,258, reflecting increases largely attributable to variable costs and room charges due to higher attendance.

Preparation of the Flexible Budget

The flexible budget adjusts the master budget costs based on the actual level of activity, enabling a more realistic comparison. It recalculates variable costs proportionally to the actual attendance, while fixed costs remain unchanged.

Key calculations for the flexible budget:

  • Attendance: 1,740 (actual)
  • Meal cost per person: $13.70 (actual)
  • Number of invitations mailed: 4,600 (actual)
  • Facility charge: Increased to $2,700 due to larger room requirement

Variable costs are adjusted as follows:

  • Meals: 1,740 x $13.70 = $23,838
  • Postage: 4,600 x $0.68 = $3,128

Fixed costs remain the same as in the master budget for printing, decorations, speaker’s gift, and publicity. The facility cost increases to $2,700.

Calculation of Sales and Variable Cost Volume Variances

Sales/Contribution Margin Variance

The sales variance (or revenue variance) mainly relates to attendance and meal price changes, but since the focus is on costs, the emphasis is on cost variance analysis. However, the volume variance can be considered from the perspective of the increase in attendees from 1,520 to 1,740, affecting variable costs proportionally.

Variable costs expected based on master budget:

  • Meals: 1,520 x $13 = $19,760
  • Postage: 3,600 x $0.68 = $2,448

Variable costs based on actual activity (flexible budget):

  • Meals: 1,740 x $13.70 = $23,838
  • Postage: 4,600 x $0.68 = $3,128

Variance calculations:

  • Meal cost volume variance:
  • Flexible budget (actual activity): $23,838
  • Master budget (expected at 1,520): $19,760
  • Variance: $+4,078 (Unfavorable) — due to higher number of meals and increased per-person cost
  • Postage volume variance:
  • Flexible budget (actual invitations): $3,128
  • Master budget (expected at 3,600): $2,448
  • Variance: $+680 (Unfavorable) — more invitations mailed than planned

Comparison of Flexible Budget and Actual Results

  • Meals: Actual: $23,838; Flexible budget: $23,838 — No variance
  • Postage: Actual: $3,128; Flexible budget: $3,128 — No variance
  • Facility: Actual: $2,700; Flexible budget: $2,700 — No variance
  • Printing: Actual and budgeted at $1,070 — No variance
  • Decorations, Speaker’s gift, Publicity: Same as budget — No variance

Overall, the major variances are due to increases in variable costs attributable to higher attendance and invitation mailing, along with increased meal price due to the added dessert. The fixed costs remained aligned with the flexible budget figures, indicating effective fixed cost control.

Conclusion and Insights

The comparison reveals that the main drivers of unfavorable variances were attributable to higher attendance and increased per-person meal costs, as well as additional invitations mailed, which contributed to increased variable costs. The higher expenditure on meals and postage directly impacted the overall cost efficiency of the event. Nonetheless, fixed costs remained well-controlled, aligning with the flexible budget, demonstrating good cost management for fixed expenses.

Such variance analysis provides valuable feedback for future planning, emphasizing the importance of flexible budgeting to accommodate actual activity levels. Moreover, it highlights the need for more accurate initial estimates and tighter control over variable expenses, which can be achieved through early supplier negotiations and tighter scope definitions for event planning.

References

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