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Chapter 11

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.

May be prepared for any activity


level in the relevant range.

Reveal variances due to good cost


control or lack of cost control.

Improve performance evaluation.

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

overhead cost per


Fixed costs activity
Depreciation $12,000 $ 12,000 $ 12,000 $ 12,000
Insurance
activity unit 2,000
units 2,000 2,000 2,000
Total fixed cost $ 14,000 $ 14,000 $ 14,000
Total overhead costs $ 74,000 $ 89,000 $ 104,000

11-9
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

Variable overhead and the activity


measure should vary in a similar
pattern.
Identify variable overhead cost
drivers.
Examples: machine hours, labor
hours, process time.
Dollar measures should be avoided
as they are subject to price-level
changes.
11-17
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
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):

Applied Fixed Overhead = PFOHR Standard Hours

Budgeted Fixed Overhead


PFOHR = Planned Activity in Hours

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

Actual Quantity Actual Quantity Standard Quantity



Actual Price Standard Price Standard Price

Price Variance Quantity Variance

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

Actual Sales Volume Actual Sales Volume Budgeted Sales Volume



Actual Sales Price Budgeted Sales Price Budgeted Sales Price

Sales Price Variance Sales Volume Variance

ASV(ASP - BSP) BSP(ASV - BSV)


ASV = Actual Sales Volume BSP = Budgeted Sales Price
ASP = Actual Sales Price BSV = Budgeted Sales Volume

11-29

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