ABSTRACT
This chapter builds on some of the budget and responsibility accounting issues introduced in the last chapter. First, we examine flexible budgeting, a technique that represents a slight refinement of the static budgeting approach described in the last chapter. In a static budgeting system, a budget is rigid in the sense that it is not modified once the actual volume of sales is known. While this approach is used extensively, some managers find it helpful to flex budgets up or down in line with the actual volume of sales achieved. Failure to accurately predict the volume of sales is a major factor causing many significant differences between the static budget and actual performance. Under flexible budgeting, however, the effect of a hotel selling more or less than was originally projected is eliminated from differences between the actual and budgeted performance. Elimination of this factor is significant because, by definition, managers in cost centres exert little influence on sales volumes. If managers in cost centres cannot affect sales, why should the effect of selling more than anticipated be included in a variance used to gauge their performance?
