BAB 7 FLEXIBLE BUDGET b7 flexi budget

(1)

Flexible Budgets and

Overhead Analysis

Chapter

(2)

Static Budgets and Performance

prepared for a single,

planned level

of

activity.

Performance evaluation

is difficult when actual

activity differs from the

planned level of

activity.

(3)

Static

Actual

Budget

Results

Variances

Machine hours

10,000

8,000

Variable costs

Ind irect labor

$

40,000

$

34,000

Indirect materials

30,000

25,500

Power

5,000

3,800

Fixed costs

Depreciation

12,000

Insurance

2,000

2,050

Total overhead costs

$

89,000

$

77,350

Static Budgets and Performance

Reports

(4)

Static

Actual

Static Budgets and Performance

Reports

U = Unfavorable variance

CheeseCo was unable to achieve

the budgeted level of activity.

(5)

Static

Actual

Static Budgets and Performance

Reports

F = Favorable variance that occurs when

(6)

Static

Actual

Static Budgets and Performance

Reports

Since cost variances are favorable, have

we done a good job controlling costs?

(7)

Static Budgets and Performance

Reports

I don’t think I

can answer the

question using

a static budget.

Actual activity is below

budgeted activity which

is unfavorable.

So, shouldn’t variable costs

be lower if actual activity

(8)



The relevant question is . . .

“How much of the favorable cost variance is

due to lower activity, and how much is due to

good cost control?”



To answer the question,

we must

the budget to the

actual level of activity.

(9)

Flexible Budgets

Improve performance evaluation.

May be prepared for any activity

level in the relevant range.

Show revenues and expenses

that should have occurred at the

actual level of activity.

(10)

Flexible Budgets

Central Concept

If you can tell me what your activity was

for the period, I will tell you what your costs

(11)

Preparing a Flexible Budget

To a budget we need to know that:



_{Total variable}

_costs

_change

in direct proportion to

changes in activity.



_{Total fixed}

_{costs remain}

unchanged

within the

relevant range.

Fixed

(12)

Preparing a Flexible Budget

(13)

Cost Total Flexible Budgets

Formula Fixed 8,000 10,000 12,000 Per Hour Cost Hours Hours Hours Machine hours 8,000 10,000 12,000

Variable costs are expressed as

a constant amount per hour.

$40,000 ÷ 10,000 hours is

$4.00 per hour.

(14)

(15)

Preparing a Flexible Budget

(16)

Preparing a Flexible Budget

(17)

Let’s prepare a

budget performance report

for CheeseCo.

Flexible Budget

(18)

Cost Total

Formula Fixed Flexible Actual

Per Hour Costs Budget Results Variances Machine hours 8,000 8,000 0 Total overhead costs $ 74,000 $ 77,350

(19)

Cost Total

Formula Fixed Flexible Actual

(20)

Remember the question:

“How much of the total

variance is due to activity

and how much is due to

cost control?”

Flexible Budget

(21)

Static

Actual

Budget

Results

Variances

Machine hours

10,000

8,000

2,000

U

Variable costs

Ind irect labor

$

40,000

$

34,000

$6,000

F

Indirect materials

30,000

25,500

4,500

F

Power

5,000

3,800

1,200

F

Fixed costs

Depreciation

12,000

0 Insurance

2,000

2,050

50 U

Total overhead costs

$

89,000

$

77,350

$11,650

F

Static Budgets and Performance

(22)

Flexible Budget

Performance Report

Difference between original static budget

and actual overhead = $11,650 F.

(23)

Flexible Budget

Performance Report

This $15,000F variance is

due to lower activity.

Overhead Variance Analysis

Activity

This $3,350

U

flexible

budget variance is due

to poor cost control.

Cost control

Static Flexible Actual Overhead Overhead Overhead

Budget at Budget at at

10,000 Hours 8,000 Hours 8,000 Hours 89,000

(24)

Flexible Budget

Performance Report

What causes

the cost

control variance?

There are two primary

reasons for unfavorable

variable overhead variances:

1. Spending

too much for

resources.

2. Using the resources

(25)

Overhead Rates and Overhead

Analysis

Overhead from the

flexible budget for the

denominator level of activity

POHR =

Recall that overhead costs are assigned

to products and services using a

predetermined overhead rate (POHR)

:

Assigned Overhead = POHR × Standard Activity

(26)

Overhead Rates and Overhead

Analysis – Example

Let’s look at overhead

rates in a

(27)

ColaCo prepared this budget for overhead:

Overhead Rates and Overhead

Analysis – Example

Total

Variable

Total

Fixed

Machine

Variable

Overhead

Fixed

Overhead

Hours

Overhead

Rate

Overhead

Rate

2,000

$

4,000

?

$

9,000

?

4,000

8,000

?

9,000

?

ColaCo applies overhead based

on machine hour activity.

ColaCo applies overhead based

on machine hour activity.

(28)

Overhead Rates and Overhead

Analysis – Example

Rate = Total

Variable Overhead ÷ Machine Hours

ColaCo prepared this budget for overhead:

This rate is constant at all levels of activity.

Total

Variable

Total

Fixed

Machine

Variable

Overhead

Fixed

Overhead

Hours

Overhead

Rate

Overhead

Rate

2,000

$

4,000

$

2.00 $

9,000

?

4,000

(29)

Total

Variable

Total

Fixed

Machine

Variable

Overhead

Fixed

Overhead

Hours

Overhead

Rate

Overhead

Rate

2,000

$

4,000

$

2.00 $

9,000

$

4.50 4,000

8,000

2.00 9,000

2.25 Overhead Rates and Overhead

Analysis – Example

Rate = Total

Fixed

Overhead ÷ Machine Hours

ColaCo prepared this budget for overhead:

(30)

Total

Variable

Total

Fixed

Machine

Variable

Overhead

Fixed

Overhead

Hours

Overhead

Rate

Overhead

Rate

2,000

$

4,000

$

2.00 $

9,000

$

4.50 4,000

8,000

2.00 9,000

2.25 Overhead Rates and Overhead

Analysis – Example

The total POHR is the sum of

the fixed and variable rates

for a given activity level.

(31)

Overhead Variances

Let’s use the

overhead rates, to

determine variable

and fixed overhead

(32)

ColaCo’s actual production for the period required

3,200 standard machine hours. Actual variable

overhead incurred for the period was $6,740.

Actual machine hours worked were 3,300.

Compute the variable overhead spending and

efficiency variances.

(33)

Variable Overhead Variances

AH × SR

AH × AR

Spending variance =

AH(AR - SR)

Efficiency variance =

SR(AH - SH)

(34)

3,300 hours 3,200 hours

× ×

$2.00 per hour $2.00 per hour

Variable Overhead Variances –

Example

(35)

Variable Overhead Variances – A

Closer Look

Spending Variance

Efficiency Variance

Results from paying more

or less than expected for

overhead items and from

excessive usage of

overhead items.

Controlled by

managing the

(36)

Overhead Variances

Now let’s turn

our attention

(37)

Overhead Rates and Overhead

Analysis – Example

ColaCo prepared this budget for overhead:

What is ColaCo’s fixed overhead rate for an

estimated activity of 3,000 machine hours?

Total

Variable

Total

Fixed

Machine

Variable

Overhead

Fixed

Overhead

Hours

Overhead

Rate

Overhead

Rate

2,000

$

4,000

$

2.00 $

9,000

$

4.50 4,000

(38)

Overhead Rates and Overhead

Analysis – Example

ColaCo prepared this budget for overhead:

What is ColaCo’s fixed overhead rate for an

estimated activity of 3,000 machine hours?

FR = $9,000 ÷ 3,000 machine hours

Fixed Overhead Rate

FR = $3.00 per machine hour

Total

Variable

Total

Fixed

Machine

Variable

Overhead

Fixed

Overhead

Hours

Overhead

Rate

Overhead

Rate

2,000

$

4,000

$

2.00 $

9,000

$

4.50 4,000

(39)

ColaCo’s actual production required 3,200

standard

machine hours. Actual fixed overhead

was $8,450.

Compute the fixed overhead budget and volume

variances.

(40)

Fixed Overhead Variances

Budget

Variance

Volume

FR = Standard Fixed Overhead Rate

SH = Standard Hours Allowed

SH × FR

Actual Fixed Fixed Fixed

Overhead Overhead Overhead

(41)

3,200 hours

(42)

Fixed Overhead Variances –

A Closer Look

Budget Variance

Volume Variance

Results from paying more

or less than expected for

overhead items.

Results from operating

at an activity level

(43)

Overhead Variances

Let’s look at a

graph showing

fixed overhead

variances. We will

(44)

Volume

Cost

3,200

Standard

3,000 Hours

Expected

Fixed Overhead Variances

Fix

ed

ov

erh

ea

d

ap

plie

d t

o p

(45)

Fixed Overhead Variances

(46)

{

3,200 machine hours × $3.00 fixed overhead rate

(47)

Results when standard hours

allowed for actual output differs

from the denominator activity.

Volume Variance – A Closer Look

Volume

Variance

Favorable

when standard hours

> denominator hours

Unfavorable

(48)

Results when standard hours

allowed for actual output differs

from the denominator activity.

Volume Variance – A Closer Look

(49)

Overhead Variances and Under- or

Overapplied Overhead Cost

The sum of the overhead variances

equals the under- or overapplied

overhead cost for a period.

Favorable

variances are equivalent

to overapplied overhead.

Unfavorable

variances are equivalent

to underapplied overhead.

(50)

End of Chapter 11

I’m here to

your

budget. Are you ready to