Professional Documents
Culture Documents
Flexible
Budgeting and
Analysis of
Overhead Costs
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Flexible Budgets
Hmm! Comparing
static budgets
Static budgets are with actual costs
prepared for a single, is like comparing
planned level of apples and oranges.
activity.
Performance
evaluation for
overhead is difficult
when actual activity
differs from the
planned level of
activity.
11-2
Advantages of Flexible Budgets
Show revenues and expenses
that should have occurred at the
actual level of activity.
11-3
Preparing a Flexible Budget
Variable Total Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00
Indirect material 3.00
Power 0.50
Total variable cost $ 7.50
Fixed costs
Depreciation $12,000
Insurance 2,000
Total fixed cost
Total overhead costs
11-4
Preparing a Flexible Budget
Variable Total Flexible Budgets
Cost 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
Variable costs a constant amount per hour.
Indirect labor 4.00 $ 32,000
Indirect material 3.00 24,000
Power 0.50 Fixed costs are expressed as a
4,000
Total variable cost $ 7.50 total amount that does not
$ 60,000
change within the relevant
Fixed costs range of activity.
Depreciation $12,000
Insurance 2,000
Total fixed cost
Total overhead costs
11-5
Preparing a Flexible Budget
Variable Total Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 $ 32,000
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable cost $ 7.50 $ 60,000
Fixed costs
Depreciation $12,000 $ 12,000
Insurance 2,000 2,000
Total fixed cost $ 14,000
Total overhead costs $ 74,000
11-6
Preparing a Flexible Budget
Variable Total Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 $ 32,000 $ 40,000 $ 48,000
Indirect material 3.00 24,000 30,000 36,000
Power 0.50 4,000 5,000 6,000
Total variable cost $ 7.50 $ 60,000 $ 75,000 $ 90,000
Fixed costs
Depreciation $12,000 $ 12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,000 2,000
Total fixed cost $ 14,000 $ 14,000 $ 14,000
Total overhead costs $ 74,000 $ 89,000 $ 104,000
11-7
Preparing a Flexible Budget
Variable Total Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
IndirectThere
Note: labor is no 4.00
flex $ 32,000 $ 40,000 $ 48,000
Indirect material 3.00 24,000 30,000 36,000
inPower
the fixed costs. 0.50 4,000 5,000 6,000
Total variable cost $ 7.50 $ 60,000 $ 75,000 $ 90,000
Fixed costs
Depreciation $12,000 $ 12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,000 2,000
Total fixed cost $ 14,000 $ 14,000 $ 14,000
Total overhead costs $ 74,000 $ 89,000 $ 104,000
11-8
Preparing a Flexible Budget
Variable Total Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs Total budgeted
Indirect labor overhead cost
4.00 $ 32,000 = $ 40,000 $ 48,000
Indirect material 3.00 24,000 30,000 36,000
Power 0.50
Budgeted variable Total 4,000 5,000 6,000
Budgeted fixed
Total variable cost $ 7.50
$ 60,000
+ $ 75,000
overhead cost
$ 90,000
11-9
Flexible Budget
Performance Report
Variable Total
Cost Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 0
Variable costs
Indirect labor $ 4.00 $ 34,000
Indirect material 3.00 25,500
Power 0.50 3,800
Total variable costs $ 7.50 $ 63,300
Fixed Expenses
Depreciation $12,000 $ 12,000
Insurance 2,000 2,000
Total fixed costs $ 14,000
Total overhead costs $ 77,300
11-10
Flexible Budget
Performance Report
Variable Total
Flexible budget
Cost
is
Fixed Flexible Actual
prepared
Per for
HourtheCosts Budget Results Variances
same activity level
Machine hours 8,000 8,000 0
(8,000 hours) as
Variable costs
actually$achieved.
Indirect labor 4.00 $ 34,000
Indirect material 3.00 25,500
Power 0.50 3,800
Total variable costs $ 7.50 $ 63,300
Fixed Expenses
Depreciation $12,000 $ 12,000
Insurance 2,000 2,000
Total fixed costs $ 14,000
Total overhead costs $ 77,300
11-11
Flexible Budget
Performance Report
Variable Total
Cost Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor $ 4.00 $ 32,000 $ 34,000 $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000 3,800 200 F
Total variable costs $ 7.50 $ 60,000 $ 63,300 $ 3,300 U
Fixed Expenses
Depreciation $12,000 $ 12,000 $ 12,000 0
Insurance 2,000 2,000 2,000 0
Total fixed costs $ 14,000 $ 14,000 0
Total overhead costs $ 74,000 $ 77,300 $ 3,300 U
11-12
Flexible Budget
Performance Report
Variable Total
Cost Fixed Flexible Actual
Indirect labor and Costs
Per Hour Budget Results Variances
indirect
Machine hours material have 8,000 8,000 0
unfavorable variances
Variable costs
because
Indirect labor actual costs
$ 4.00 $ 32,000 $ 34,000 $ 2,000 U
are
Indirect more than3.00
material the 24,000 25,500 1,500 U
Power 0.50
flexible budget costs. 4,000 3,800 200 F
Total variable costs $ 7.50 $ 60,000 $ 63,300 $ 3,300 U
Fixed Expenses
Depreciation $12,000 $ 12,000 $ 12,000 0
Insurance 2,000 2,000 2,000 0
Total fixed costs $ 14,000 $ 14,000 0
Total overhead costs $ 74,000 $ 77,300 $ 3,300 U
11-13
Flexible Budget
Performance Report
Variable Total
Cost Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Power has a favorable
Variable costs
variance
Indirect labor because
$ 4.00the $ 32,000 $ 34,000 $ 2,000 U
actualmaterial
Indirect cost is less than
3.00 24,000 25,500 1,500 U
the flexible budget0.50
Power cost. 4,000 3,800 200 F
Total variable costs $ 7.50 $ 60,000 $ 63,300 $ 3,300 U
Fixed Expenses
Depreciation $12,000 $ 12,000 $ 12,000 0
Insurance 2,000 2,000 2,000 0
Total fixed costs $ 14,000 $ 14,000 0
Total overhead costs $ 74,000 $ 77,300 $ 3,300 U
11-14
Overhead Application in a Standard
Costing System
11-15
Overhead Application in a Standard
Costing System
11-16
Choice of Activity Measure
Spending Efficiency
Variance Variance
AH = Actual Hours of Activity
AR = Actual Variable Overhead Rate
SVR = Standard Variable Overhead Rate
SH = Standard Hours Allowed
11-18
Variable Overhead Variances
Actual Flexible Budget Flexible Budget
Variable for Variable for Variable
Overhead Overhead at Overhead at
Incurred Actual Hours Standard Hours
AH AR AH SVR SH SVR
Spending Efficiency
Variance Variance
Spending variance = AH(AR - SVR)
Efficiency variance = SVR(AH - SH)
11-19
Fixed Overhead Variances
Actual Fixed Fixed Fixed
Overhead Overhead Overhead
Incurred Budget Applied
SH PFOHR
Budget Volume
Variance Variance
PFOHR = Predetermined Fixed Overhead Rate
SH = Standard Hours Allowed
11-20
Fixed Overhead
Recall that fixed overhead costs are applied to
products and services using a predetermined
fixed overhead rate (PFOHR):
11-21
Fixed Overhead Variances
A Closer Look
Budget Variance Volume Variance
Results from paying more Results from the inability
or less than expected for to operate at the activity
overhead items. level planned for the period.
Has no significance for
cost control.
11-22
Overhead Cost Performance
Report
11-23
Activity-Based Flexible Budget
Variable Total Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 $ 32,000 $ 40,000 $ 48,000
Indirect material 3.00 24,000 30,000 36,000
Power 0.50 4,000 5,000 6,000
Total variable cost $ 7.50 $ 60,000 $ 75,000 $ 90,000
Fixed costs
The Cheese Co.s flexible
Depreciation $12,000 $ 12,000 $ 12,000 $ 12,000
Insurance 2,000 2,000 2,000 2,000
budget is based on a single $ 14,000
Total fixed cost $ 14,000 $ 14,000
costoverhead
Total driver,costs
machine hours $ 74,000 $ 89,000 $ 104,000
11-24
Activity-Based Flexible Budget
Variable Total Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 $ 32,000 $ 40,000 $ 48,000
Indirect material 3.00 24,000 30,000 36,000
Power 0.50 4,000 5,000 6,000
Total variable cost $ 7.50 $ 60,000 $ 75,000 $ 90,000
If costs
Fixed different cost drivers are identified for the
Depreciation $12,000 $ 12,000 $ 12,000 $ 12,000
different
Insurance
variable costs, an activity-based
2,000 2,000
flexible
2,000 2,000
budget
Total should be prepared $with
fixed cost different
14,000 cost$ 14,000
$ 14,000
formulas
Total overhead based on the different
costs $ 74,000 drivers.
$ 89,000 $ 104,000
11-25
Standard Costs and Product
Costing
11-26
Standard Costs and Product
Costing
11-27
A General Model for Variance
Analysis
AQ(AP
Materials price- SP)
variance SP(AQ
Materials - SQ)
quantity variance
Labor rate variance Labor efficiency variance
AQ =Variable
Actual overhead
Quantity SP = Standard
Variable Price
overhead
AP = spending
Actual Price
variance SQ = Standard
efficiency Quantity
variance
11-28
A General Model for Variance
Analysis
11-29