Accounting 2 – ACCT 122 – Program #238 – Budgeting – Conclusion and Flexible Budgets

>>Hello, everybody. Here we are again. What we're going to do today is we are going
to finish up Chapter 22 which is on budgeting. We're going to go over that homework that
I assigned. And then we are going to start Chapter 23
which will be the last chapter that we cover in this class. So we are getting to the end. But let's go ahead and go right onto the homework. The first one I asked was Quick Study 2213;
is that right? Okay, that was a real tough one, wasn't it? Did you do this one, anybody? You didn't do this one? This one was easy. We had a lot of people who didn't do their
homework. We have a lot of people we had a lot of people
who made poor decisions in this class, didn't we? So, hopefully you at home, you did your homework,
maybe someday you can manage these people because they didn't do their homework.

No, I'm just kidding. Yes, that's exactly right. Okay. Following are selected accounts for a company. For each account, indicate whether it will
appear on a budgeted income statement, a budgeted balance sheet or if an item will not appear
on either, label it NA. Okay? All right, sales, what do you think? If you didn't do it, you can probably do it
now. Budgeted income statement. Office salaries paid? Budgeted income statement, correct? Accumulated appreciation? >>Balance sheet. >>Budgeted balance sheet. Amortization expense? Budgeted income statement, okay. Interest paid on notes payable? Budgeted income statement. Cash dividends paid? Actually no, because that goes on the statement
of retained earnings, right? So it's not, it's neither on the balance sheet
nor the income statement so that is an NA. Go on the statement of retain release, or
you go on the budget of statement of retainer release. Bank loan owed? Budgeted balance sheet.

Cost of goods sold? Budgeted income statement, very nice. Okay, so any questions on those? That wasn't too hard, was it? Okay. All right, let's go ahead then and take a
look at Exercise 223, okay? All right, Exercise 223. All right. Okay, use the following information to prepare
the July cash budget for Acco Co. It should show expected cash receipts and
cash disbursements for the month and the cash balance expected on the end of July. Okay, the beginning cash balance of July 1st
is 50,000.

Cash receipts from sales, 30% is collected
in the month of sale. 50% is in the next month and 20% in the second
month after the sale. Uncollectible accounts are negligible and
can be ignored. Sales amounts are and then they give those
two for us for May, June and July. Payments on merchandise purchases. 60% is paid in the month of the purchase and
40% in the month following. And then they give us the purchase amounts
for June and July. They tell us the budgeted cash disbursements
for salaries in July. They tell us the budgeted appreciation expense
for July. Other cash expense budgeted for July is 200,000. Accrued income tax is due in July is 80,000. And the bank loan interest due in July is
6,600. They give us a check figure over here, 122,400,
okay? All right. Well, the first thing that we need to do is
we need to figure out our cash receipts from sales as well as our cash payments for merchandise,
okay? So, let's go ahead and go down here and do
that, all right? Let's take first a look at all right, let
me straighten this out at the cash receipts in July from sales.

Okay. Henry, is that what you got? 1.364 million? >>Yeah. >>It is? Okay, did anybody else get that? Matt, you did? Okay. And in July they'll receive 20% of May's sales,
50% of June sales and 30% of July sales. And this is just based on that collection
pattern that they said. I think we've done these before, haven't we? Okay. So that has a little tick mark up there. We'll take it up to the schedule here in a
minute. But that is the supporting calculation for
the cash receipts from sales of the cash receipts in July from sales. Okay? We use similar logic for the cash disbursements
in July for merchandise. Okay, that would be 40% of the 700,000 as
well as 60% of 750,000.

Okay, which would give us 280 and 450,000,
totaling up at 730 and we'll take that up here in a second. But these are the two supporting calculations
that you really need to do before you do the cash budget, okay? All right, once we have those numbers, the
1.364 million and the 730,000, let's take a look at the answer's entirety. Okay? A little too much zoom there. Okay. We have our beginning cash balance, which
was given. We have our cash receipts of 1.364 million
which we calculated below. Those added up together, give us the cash
available. Then we have our cash disbursements. We have our payments for merchandise of 730,000,
which we did down below, right? We have salaries. We have other expenses.

We have accrued taxes that are going to be
paid out in July and we have interest on the bank loan. The total of that disbursements is this number
right here. That minus that equals an ending cash balance
of 122,400, okay? Now there was one item that they gave us information
on that we did not list, what was that? >>Depreciation expense. >>Depreciation. Why did we not list depreciation expense? >>No cash. >>It is, yeah, correct, Henry. It is a noncash expense. Remember us talking about that in the cash
flow statement? Depreciation expense does show up on the income
statement but do we write a check for cash? If we have depreciation expense of 50,000,
can we trace it to a check that we wrote for 50,000? No, so we do not taking a look at this cash
budget again, we do not include depreciation expense in here because this is a cash budget
and there is no cash disbursement for depreciation expense.

Cool? All right, good one. Questions on 223? Any questions on that, guys? All right. If not, let's hop over to Exercise 2217, okay? All right, I know these take a while but got
to do your homework. Got to do your homework if you want to perform
well on the tests. Okay. Now, here is 2217. Let me put it up on its entirety on the screen,
okay? And I'm going to do this one a little differently
as far as presenting the answer.

But that okay, what they want us to do, the
following information is available for Zetrov Company. What they want us to do is they want us to
prepare a budgeted balance sheet for March, okay? They want us to prepare a budgeted balance
sheet for March. So what I'm going to do is, I'm not going
to read through this now. I'm going to actually read it as we're doing
it and let's fill in the balance sheet as we're reading it, okay? So let's hop over to the computer. And what we are going to do is we are going
to do a budgeted balance sheet for March for Zetrov Company. Okay? So we're going to fill in things as we read
them. All righty. Okay, we label this up there at the top. Zetrov Company Budgeted Balance Sheet as of
March 31st. Okay, the first item they say is the cash
budget for March shows an ending balance an ending bank loan of $10,000. Okay, so we have a bank loan payable of $10,000,
and an ending cash balance of 50,000. So these items we just read, right? See what we're doing here? Okay.

B, the sales budget for March indicates sales
of 140,000. Accounts receivable are expected to be 70%
of the current month sales. Okay, so we can figure out our accounts receivable
and that's 98,000. That's 70% of that $140,000. Okay? Item C, the merchandise purchase budget indicates
$89,000 in merchandise where we purchased on account in March. Purchases on account are paid 100% in the
month following the purchase. Now, ending inventory for March is predicted
to be 600 units at a cost of $35 each. Thus we know our merchandise inventory is
$21,000. That is the 600 units times the $35 per unit. So we can figure up our total current assets
here is $169,000. You with me so far? Okay, the budgeted income statement for March
shows net income of $48,000. Depreciation expense of 1,000 and 26,000 in
income tax expense were used in computing that income for March. Accrued taxes will be paid in April. Okay, we have income taxes. We have an income tax liability. Income tax is payable of $26,000 from reading
that, okay? All right.

And they said what our net income was, right? We're going to use that here in a supporting
calculation over here in a minute. So let's just go ahead and list that, all
right? Let's see what else we have here. Yeah, let's go ahead and, though they said
depreciation expense is 1,000, is that what they said? Okay, so we'll list that here too. Why do we want those items? Well, let's go on to item E and we'll read
it and we'll know why. The balance sheet for February shows equipment
with $84,000 with accumulated depreciation of 46,000.

Okay, so the beginning balance, we're going
to do our supporting calculations over here. Our beginning balance of accumulated depreciation
is 46,000 then, right? When we have our depreciation expense of 1,000
that we just read about, thus our ending balance for accumulated depreciation is 47,000. Are you with me? Okay. Let's keep reading. Okay, let's read item E still. The balance sheet for February shows equipment
for 84,000, so we can list that there too, right? So now we know the net book value of the equipment,
okay? Accumulated appreciation of 46, we just read
that. Common stock of 25,000, right? And ending retained earnings of $8,000, okay? Ending retained earnings of $8,000. Now that was for February, right? So the beginning balance for March of retained
earnings is $8,000.

We add our net income of 48,000 and we get
an ending balance of retained earnings of 56,000, okay? So our retained earnings are 56,000, all right? Oh, what did we forget to put up there? Accounts payable. What are accounts payable? Well, we'd go up to item C it said purchases
indicate that 89,000 in merchandise would be purchased on account in March and it'll
be all payable the next month. So we have a liability of 89,000; is that
correct? Okay, we need to do some totaling up here
but any questions on where we get the numbers that are showing? Okay, now we're going to add these two numbers
to get our total assets of $206,000.

Our total liabilities are the sum of these
three and that is 125,000. Our total equity is the sum of those two. That is 81,000. If we add these two amounts we get 206,000
and that's our total liabilities in equity. So I think we have everything, don't we? Okay. That's a little bit more of a difficult one. You got to kind of just create the balance
sheet as they give you these items, and you have to do these supporting calculations. Now she's supporting calculations over here,
those would not be on the balance sheet. This might be a footnote to it or something
to it. The balance sheet is this part right here,
the budgeted balance sheet it is, okay? Correct? All right, any questions on that, guys? All right, we have one more, okay? Let's take a look at it.

Exercise 2218. This one I think was a little bit easier. Okay, this one right here. Fortune, Inc is preparing its master budget
for the first quarter. The company sells a single product at a price
of $25 per unit. Sales in unit are forecasted at 45,000 for
January, 55,000 for February and 50,000 for March. Cost of goods sold is $14 per unit. Other expense information for the first quarter
follows. Prepare a budgeted income statement. Now what period are we doing it for? For the first quarter, which is January, February
and March, right? And then they give us this information right
here. Commission is 8% of sales. Rent is 14,000 per month. Advertising is 15% of sales. Office salaries are 75,000 per month. Depreciation is 40,000 per month. Interest is 15% annually on a 250,000 note
payable, and the tax rate is 30%, okay? All right, well, we have to do some supporting
calculations first.

And let's take a look at those. The first thing we need to do is figure out
what our sales dollars is going to be. Okay, so sales dollars, the unit sales for
those three months are as shown, right? So that's 150,000 units for the first quarter. The unit sales price is $25 so our sales dollars
will be 3.75 million, okay? All right, we have to do a similar analysis
for cost of goods sold. We had the same number of unit sales, the
150,000, by taking each month's unit sales.

What did they say the unit cost was per item? 14 bucks? So the cost of goods sold in dollars is $2.1
billion, okay? So, let's take a look then, now that we know
those numbers, let's take a look at the complete answer, all right? All right, zoom out a little bit. We'll just go through these items, okay? All right, well sales and cost of goods sold
we derived just a few seconds ago, right? Via those calculations. That gives us gross profit of 1.65 million,
okay? Now let's take a look at our operating expenses. Well our commissions expense are 8% of sales,
okay? They give us that. So 8% of 3.75 million is 300,000, all right? Rent expense they say is 14,000 per month. There's 3 months in this quarter, so 3 times
14,000 is 42,000, okay? Advertising expense is 15% of sales. So 15% times 3.75 million is 562,500, okay? What about office salaries expense? Well they tell us it's at 75,000 per month.

We have 3 months so it's $225,000, okay? Depreciation expense they tell us is 40,000
per month, right? We have 3 months, so it's 120,000 for the
quarter. Interest expense, okay, well what do they
tell us about that? It's 15% annually on a 250,000 note payable. So you take the 15% times the 250,000 times
onefourth or threetwelfths. That's how much they'll pay in that quarter,
the 9375. The total of those operating expenses is 1,258,875. And then we get net income before taxes of
391,125, right? They tell us the income tax rate is 30%. So what is 30% of that number? It is 117,338, you might needed to round there,
that's fine.

Our net income before tax minus our income
tax expense gives us a net income, bottomline of 273,787, okay? All right. Once again, a little bit more difficult one
of a homework problem, okay? So any questions on that? Anybody? All right, great. Okay, we are officially done with Chapter
22 except for your Chapter 22 Connect assignment, okay? So you guys can go out there and do your Chapter
22 Connect assignment. One thing I want to caution you on is on your
Chapter 22 Connect assignment is, and I think I noted this in the instructions and they
have it noted there too. But if you're the type of person that doesn't
read instructions, you can get in trouble is, make sure you really focus on those instructions. One of the things they're big on is items
that are being deducted need to be in minus signs, okay? So let me see if I can find an example of
that in one that we have done.

Hold on a second. All right, I don't think we did this one but
just as an example, like, if you are doing this budget right here and you're subtracting
beginning inventory to get units to be produced, when you enter that into your Connect assignment,
don't enter it in as 75,000 even if you are planning to deducting it. If it's going to be deducted put the parenthesis
around it, does that make sense? So make sure you do that on this Chapter 22
Connect assignment. Okay? Luke? >>So, Connect we'll be able to read as putting
the parenthesis rather than a negative sign, is that the what you're saying? >>I think you can do either one. I think it might if you put a minus sign,
I think it changes it to a bracket but I think you should be able to does it, Matt? >>I think so. >>Yeah. Just make sure you read the instructions real

I think the most important parts are in red,
okay? So don't if you're the sort of person that
skips instructions, try not to do that this time. Okay, now what we're going to do is we are
officially going to shift gears here, okay. And we are going to start talking about Chapter
23. Chapter 23 is on flexible budgets and standard
costs, okay? This is the last Chapter that we'll cover
in this class.

Now, we're only going to go a couple of slides
into this right now but we're going to talk about using some of this information that
we have learned to manage our company. And the use of budgeting to control and manage
our company, okay. We develop our budget from our objectives
then we know that we can compare the actual budget, the actual with the budget, right? The actual numbers that we achieved with the
amounts budgeted to see what sort of variances or differences that we have. We're going to look at larger variances and
take action and try to fix them and then we'll go through the whole thing again, okay? Now, I'm going to go through another example
with lawn mowing. I don't know why all my examples have to do
with lawn mowing but it seems like a good, simple company to explain.

So what we're going to do now is, I'm going
to close this out and we are going to work through a problem on Excel. And I don't want you all to take notes on
this, okay? For you folks that are here, I'm going to
give you this when we're done, okay. But I don't want you writing that down and
I don't want you to looking ahead, I want you just to listen, okay. Just to watch and listen. I think it goes better if you are chronologically
following me while we develop this. But you don't need to take the time and effort
to write all this down; I will give this to you. Okay? For you folks at home, this is in your handouts
but try just not to look at it while we're working on it.

Try to just look at the screen and see the
logic that we're working with, chronologically, how we're developing this, okay? So let's just focus on this screen and I'll
show you what we're going to do here, okay? Henry, let's say that you are going to start
a lawn mowing company, okay? At the end of the spring semester. And you're going to mow lawns in the summer
months, just June, July and August. Okay. Now, you want to develop you want to develop
a budget for your lawn mowing company, okay? You kind of want to do a budgeted income statement,
so to speak, for your lawn mowing company, for June, July and August. Now you're not going to do 3 monthly budgets,
you're just going to do one budget for all three months combined for the summer, okay? So you're trying to figure out what sort of
items you need to budget.

Well, you know you need to budget your revenue,
right? And you also know that you're going to have
some cost items that you need to budget for, such as now you own your own lawn mower but
you're going to have to put some gas in it to make it run, okay. You're going to rent a shed to keep the lawn
mower in and the gas in and, you know, maybe some other small tools and stuff like that. Okay, so you're going to have a cost of the
shed rental. You're going to have a little advertising
cost. You're going to advertise in the Kansas City
Star weekend newspaper, okay. And let's say you have a neighbor who's a
high schooler and you're going to pay him some wages to help you with this. Are you with me? Okay. So now there's probably more cost items but
we want to kind of keep this simple.

So for your lawn mowing company for the summer,
these are the things that we want to do a budget for, okay? So you start to work on your budget. Now you estimate that you're going to mow
about, total, 100 lawns for the summer, okay? And you charge about $50 per lawn. So you're budgeting total revenue for the
summer of $5,000, you with me? Okay. You think you'll spend a total of about $700
in the summer on gasoline. Okay. In regards to the shed rental, you budget
an amount of $150 because you're paying $50 a month for each of those three summer months. So 3 times 50 is 150, you following me? Okay. In regards to advertising, you're going to
run a weekend ad on Saturdays and it's going to be about $25 a weekend.

There's 12 weekends. So 25 times 12, 300. You with me? Okay. The total wages that you think you'll pay
this high schooler for the summer, $1,600. So your total cost that you're budgeting for
for the summer is 2,750, which is the total of these, you with me? And you can figure out what your budgeted
net income is as well, right? It's the 5,000 minus the 27.50 equals the
22.50. You following me so far? Okay. Now, the summer comes and goes, okay? And we now have actual amounts for all of
these items. Okay, these are just actual amounts achieved. You just look at your accounting records. What you paid and what you received. And we see that the numbers that we got, well,
we actually received $5,200 in revenue.

Okay? Gasoline you actually spent $730 on. The shed rental, you actually spent $170 on. Advertising, you actually spent 285 on. The wages of the high schooler you actually
paid out were 1,690, that's total costs of 2,875. And then an actual net income realized of
2,325, are you with me? Okay, so now we have our budget, we have our
actual. And what we want to figure out is our differences. Okay? So what's the difference between 5,000 and
5,200? 200 bucks. Now we also have to decide if this is favorable
or unfavorable, okay? Well, you budgeted for 5,000 in revenue, you
actually achieved 5,200 in revenue, is that the favorable or unfavorable? That's favorable.

All right, gasoline you budgeted for 700. You actually spent 730 on gasoline, that's
a difference of $30, right? Is that favorable or unfavorable? That's unfavorable, right? Now we don't show positive and negative numbers
here, we just show positive numbers and we indicate with F and U. What does F and U stand
for? >>Favorable and unfavorable. >>Favorable and unfavorable, right? Okay. So we used favorable and unfavorable as opposed
to positive and negative signs. Now you got to be careful. When your revenues are greater than your budget,
that's favorable, right? When your actual expenses are greater than
your budget, that's unfavorable, right? Okay.

All right, shed rental, you budgeted 150,
you actually spent 170, that's a $20 difference. Is that favorable or unfavorable? >>Unfavorable. >>Unfavorable. Advertising, you budget at 300, you actually
spent 285 and that is $15, and what is it? That's favorable. You actually spent less than what you budget. The wages of the high school, you budget it
for 1,600. You actually spent 1,690, that's a $90 difference,
right? Is that the favorable or unfavorable? >>Unfavorable. >>Unfavorable, okay. Now we can figure out our total cost difference. You could just compare these two numbers. Your budgeted total costs was 2,750, your
actual total cost was 2,875, that's a $125 difference, is that favorable or unfavorable? >>Unfavorable.

>>That's unfavorable. Now you could also net these numbers out to
see what the net favorable or unfavorable amount was. In this case, those four numbers net out to
a 125 unfavorable amount. You following me? Well now we can also figure out our net income
difference. 2,250, 2,325, that's a $75 difference. That is favorable, is it not? Because you budgeted for 2,250 income, you
had 2,325? You could also net out the 200 favorable with
the 125 unfavorable for revenues and total costs respectively to get your $75 favorable. Are you with me? Okay. Aren't you glad you don't have to write all
this down, okay. Now, we have a problem, however. Okay? And here is the problem. When it was all said and done, Henry, when
the summer was over, you actually mowed 110 lawns. So these actual amounts are based on your
actual activity level of 110 lawns. Now do you see the problem there? >>Pay $50 each. >>Well there's something there's something
askew, isn't there? But think about this, when you did your budget,
Henry, you were budgeting for 100 lawns.

You actually mowed 110 lawns, that's 10% more
lawns than what you had budgeted for. If the activity level that was actually achieved
that was different from the activity level that you budgeted for, there should be no
big surprise that some of these amounts are different. But when you look at the screen, these amounts
have problems because we don't know if these differences, guys, are in regards to poor
or superior cost in revenue management or simply due to the fact that the activity level
was different. So these amounts right here, we're going to
kind of highlight this in kind of red. These really are just not that helpful because
we just don't know whether these differences are due simply to a change in activity or

Are you with me? So what we want to do is we want to recognize
the fact that the budget that you originally prepared, Henry, was what we call a fixed
or static budget. It is prepared at one activity level and that
activity level was at 100 lawns. The actual achieved was 110 lawns, thus we
have problems with our differences. So what we want to do is we want to explore
the concept of fixed or static budgeting versus what we call flexible budgeting. We want to what we call "flex the budget". The whole idea of a flexible budget is if
you can tell me what your activity is, I can tell you what your revenues and expenses should
be at that activity level. And then you can compare those flexible budget
amounts to the actual amounts achieved. You following me? Now the first step in doing this, folks, is
we have to classify each one of these items as variable or fixed in relation to the activity

And what is the activity level specifically,
conceptually, in this example? >>Number of lawns. >>It's the number of lawns mowed, right? Okay. So let's go through these items and let's
classify if they are revenue or if they are fixed or variable in regards to the number
of lawns mowed, okay? What about revenue? What do you think? >>It's a variable. >>It's a variable. The more lawns we mow, the higher our revenue
will be.

What about gasoline? >>It's a variable. >>It's a variable as well. What about the shed rental? >>It's fixed. >>It's fixed. We said it was $50 per month, right? And the advertising is also fixed, $25 per
weekend times 12 weekends. What about the wages of the high schooler? >>Variable. >>That's a variable. All right. Now what we want to do is for those items
that are variable, we want to figure out the formula for that. Now we can use this fixed static budget information
to derive these formulas if we are just cognizant about the total amount and the activity level
that you budgeted to that.

Okay, I'll give you an example. If Henry budgeted a total of $5,000 of revenue
for 100 lawns, basically, what was the variable formula he was using per lawn? What's the sale price per lawn?
>>$50 per lawn. >>$50 per lawn, right? Now we don't do this for fixed items, right? We just do it for variable items. Gasoline is a variable, however. If he budgeted a total of $700 to be spent
for the summer for 100 lawns, basically what is he budgeting per lawn? >>$7.
>>$7 a lawn, okay? If he budgeted a total of $1,600 for 100 lawns,
basically what is he budgeting per lawn? >>$16.
>>$16 per lawn. Cool? You with me? Now what we can do, is using this information,
we can derive our flexible budget. In this flexible budget, what do you think
the activity level we will flex it at will be? >>110. >>110 lawns. Because the whole key in this thing is that
we want the budget and the actual to be at the same activity level. Therefore the differences will be meaningful,
they won't be due, perhaps, it's just simply a change in activity level from what we predicted.

Okay. So now let's do our flexible budget. If Henry budgeted $50 a lawn in revenue times
110 lawns, what is the total revenue for the summer? $5,500, right? 50 times 110. If he budgeted $7 a lawn for 110 lawns, what
should be the total flexible budget number? >>770. >>770. >>Now, for the fixed amounts, he budgeted
150 in 300 for shed rental and advertising respectively, right? You recognize that would be the same amounts
he would budget at 110 lawns because those are fixed. Those have nothing to do with activity level,
you with me? I thought I highlighted that, did I not? Okay. $50 a lawn times 110 lawns is 5,500, you with
me? I'm going to back up here, okay? $50 a lawn
times 110 lawns is 5,500. $7 a lawn times 110 lawn is 770, and these
amounts are fixed. Right? Now we're back on track.

If he budgeted $16 per lawn times 110 lawns,
that ones a little more, you can't do that one in your head but that's 1,760, isn't it? You with me? So, his total budgeted costs at the flexible
budget, 110 lawn level, is the sum of those four numbers which is 2,980. And his net income, at the flexible budget
activity level of 110 lawns, would be 5,500 minus 2,980 equals 2,520. Are you with me? Now we can figure out some meaningful differences. Okay? Some meaningful differences. The difference between these two numbers is
300, is that favorable or unfavorable? >>Unfavorable. >>It's unfavorable. Why Matt? I agree with you. >>Because he's $300 under what he budgeted
it. >>Yeah. His actual revenue achieved for 110 lawns
was 5,200 versus the 5,500. The difference between these two numbers is
$40, is that favorable or unfavorable? >>Favorable. >>That's favorable.

He spent less of that activity level than
when he budgeted for gasoline. Okay. The difference between 150 and 70 is $20,
and this is unfavorable. The difference between these is 15 and that
is favorable, okay. So these amounts right here are going to be
the same amounts here because, again, it's fixed. Okay? But we have a $20 unfavorable amount for shed
rental. A $15 favorable difference for advertising,
okay? Now some might say, before we move on, they
might say, well wait a minute, Dave. How could there be any difference here in
regards to the shed rental? And the same thing with advertising. These are fixed, these are supposed to be
predictable. Now let me remind you something. Just because something is a fixed cost does
not mean it's 100% predictable and that we'll always have zero differences between our flexible
budget and our actual, okay. Just because a cost is fixed does not mean
that it's 100% predictable.

For example, property taxes on a factory are
fixed, are they not? Do you think you will predict exactly what
your property taxes will be? No. Now looking at this example, let's just kind
of make up a little story as far as why your shed rental might be different than the 150
in actuality. Well maybe you were putting in your mower
in one night and you hit the door wrong to the shed and you busted off one of the hinges.

So you told the guy, "Well, hey I busted a
hinge on your shed. Sorry about that." And he said, "No big deal." He says, "I'll go buy a new hinge and some
parts and I'll fix it." He goes, "I'll be able to charge you for it." He says that's fine. Well, it cost $20 to fix the hinge on that
door and he makes you pay for it, right? Well you could probably put that $20 in your
shed rental, that's probably the expense you would debit it to, right? Okay. So that might be why that's more. A reason that advertising might be less, looking
at the screen, maybe you had a $15 off coupon that you asked if you could use. And they said, yeah, we'll let you use the
$15 off.

So they actually let you take $15 off one
of the weekends unless your advertising was a little less than what you budgeted. You with me? Okay. Fixed costs are not 100% predictable and they
will have differences, even at the flexible budget logic, okay? All right, wages of a high schooler. You budgeted them at 1,760. The actual amount was 1,690. That's a $70 difference. Is that favorable or unfavorable? >>Favorable. >>Favorable. Okay. So if we add these up, that's a 105 favorable
or you could simply compare those two numbers. And then if you do a net income between these
two numbers, a net income difference, that's $195 unfavorable.

Or you could net out a $300 unfavorable revenue
difference with a 105 favorable cost difference and that would net out to 195 total net income
unfavorable. You with me? Now, these are really are meaningful columns
right here. I'll make those in green. Okay? Now, do you see where the meaningful difference
is based on a flexible budgeting methodology is a lot different than the differences in
regards to a fixed budget? Right? Okay. These numbers were kind of worthless in the
red, right? You have to understand this flexible budgeting
logic to be able to get meaningful numbers.

These are quite a bit different. If somebody didn't understand flexible budgeting
and they figured out these numbers, they could come to a lot of incorrect conclusions as
a manager, right? Oh, we did great, that's a $75 favorable variance
on net income. Well actually it's 195 unfavorable, okay. All right, now, the better way to prepare
this is actually like as shown here. Okay? This is that same information above in green
except we did it in a contribution margin format. We listed out the revenue, then we have our
variable costs, okay, for gasoline and the wages of the high schooler. Revenue minus our variable cost is our contribution

Then we had our fixed cost for the shed rental
and the advertising. And then we had our net income. We put our flexible budgeting numbers here. We put our actual results here. Notice that it's at the same activity level,
okay? Because this is a flexible budget. Then we have our variances over here and this
is all the same information as above, it's just put into a more concise report in proper
form, okay? You following me? Now again, I'm going to give you all a handout
that has all this information on it. But I think it's easier to just follow the
logic as we chronologically move through it. Okay? Any questions on any of that? Anybody? Blake? >>If you did 110 lawns, how come you only
got $5,500 in revenue? Like how'd that actual
>>Okay, that's good.

Well, I think you meant if you mowed 110 lawns,
why did you only get 5,200 in revenue? >>Like mowed them at a fixed rate. >>That's a great question. Well, maybe there's a lot of differences. Now he budgeted that he would ask $50 per
lawn, right? For sales. >>Not everyone's going to pay for that. >>But maybe somebody won't pay $50 or somebody
said, "Hey Henry, come on you're my buddy, would you do it for 40?" And you're like okay I'll do it for 40. Okay? Or maybe you, maybe when you were mowing you
ran over a sprinkler head and you broke it and so they said, well, we're not going to
pay you for this.

We're going to have to buy the sprinkler head
so we're not going to pay you for that one. There could be a number of different reasons
that actual revenue achieved is different than what you budgeted for. That's a great question though, Blake. You see what I'm saying? >>Yeah, yeah
>>We can think of a lot of different scenarios. If somebody said you promised you would mow
this last week, I'm not going to pay you full price because you're late. >>But wouldn't you want to budget with those
expectations? >>But he might have.

He might have. Now I don't know. Maybe he actually thought that he was going
to try to really get 55 or 60. And so he budgeted for 50 but he just didn't
budget, you know, enough. So, again, but this is helpful for him, right? It's helpful for him to know that, you know,
I really thought at 110 lawns I would have revenue of 5,500 and yet I only have 5,200
of revenue at 110 lawns. As a manager, he can start to unpack that
and see what the problem was and maybe the problem was some of those things that we talked
about. Some of the difficulties that he faced. But we know that that difference is a meaningful
difference, it's not just an activitylevel difference. Great question. Other questions? Okay. One thing about life is we budget for things
and then life happens, right? Okay. If you've ever made personal budgets that
you know this, right? Things change. Gasoline prices change. Things break. Okay? People won't pay and you wanted them to pay.

There's a lot of reasons that actual results
can be different than budget but we want to have those variances be meaningful so they
can help us manage and control our business. Okay, cool? Other questions? >>Do we get dual credit for an accounting
and a philosophy class? >>Yeah, this is accounting and philosophy. Yeah, yeah. Definitely. There is probably some philosophy term for
what I just said but I don't remember it. Okay, I only have one homework question for
you to do but I really would like you to do it, okay? And what it is, and I'll pass this out after
the camera stop rolling. But it is this Chapter 23 flexible budget
homework question for Bruce's A1 Chimney Sweep, okay? This is a whole page, okay. And it really is going to be walking you through
doing something that is exactly like what we did with the lawns. Okay? So if you think back to that or rewatch the
video, that should help you as you prepare this. The other thing you can look at is, I say
down here at the bottom, is take a look at Exhibit 23.4 in your textbook on page 952.

That would give you some guidance as well. Take a look to see what your textbook has
to say about flexible budgets as well. And you can also look, and I haven't given
this to you folks yet, but in your Chapter 23 slides they walk through a flexible budgeting
example in the PowerPoint slides. I just don't like it as well as the lawn mowing
one. I think the lawn mowing one is clearer. So but if you want to look at what the PowerPoint
slides had to say about it, do that as well. But do that, Bruce's A+ Chimney Sweep problem
for next time and we will see you later. Remember to do your Chapter 22 Connect as
well. Byebye..

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