This process is used to create a combined fixed/variable budget with costs and revenues divided into fixed and variable parts. This is done by transferring values from one budget to two others that have been reserved for fixed and variable costs and revenues. These budgets are then used in cost center models and the report generator.
A fixed/variable budget makes it easier to see how the outcome is affected by variable costs.
Definition of Two New Budgets
The two budgets to be used for fixed and variable costs respectively are defined in 'Budget. Create Fixed/Variable' (CAS160).
This is done by first specifying the budget from which the values are to be retrieved and then by defining the budgets that will contain the fixed and variable costs respectively.
Division into Fixed and Variable Costs
In order to specify the costs, a so-called cost center model is used. This is a template consisting of a group of pre-defined lines controlling the type of costs to be included.
The division into fixed and variable costs is determined by resource drivers.
For each cost center account and resource driver, a variable share is defined as a percentage; the remaining share is seen as a fixed. This is done in 'Resource Driver. Enter Connection' (CAS041). The variable share is used to split the budget. The division is done during the budget process.
The following example illustrates how the fixed/variable budget is used to check how the outcome is affected by variable costs.
A department has a budgeted cost of EUR 10,000. The fixed share of this amount – rent, etc. – amounts to EUR 8,000. The remaining 2,000 is a variable amount based on the assumption that 1,000 hours will be used at the cost of EUR 2 per hour. The resource driver in this case is Hours.
The outcome is EUR 9,800. In comparison to the budgeted EUR 10,000, the outcome is EUR 200 lower than the budget.
The conclusion that the actual outcome is better than the budgeted outcome presumes that the activity (in this case calculated in hours) has been the same. However, in this example, the activity has been decreased to 800 which means the budget has to be adjusted.
The fixed part is still EUR 8,000. The variable part of the adjusted budget is EUR 1,600 with the same cost per hour (800 hours x EUR 2). The total cost will then be EUR 9,600. The cost outcome of EUR 9,800 demonstrates however that what seemingly was an improvement of EUR 200 against the budget is in fact a deterioration of EUR 200 after adjustment.