Flexible budget (Management Accounting)

All theory or concept regarding FLEXIBLE BUDGETING.

1. McGraw-Hill/Irwin
11-11-11
Flexible Budgets
Hmm! Comparing
static budgets
with actual costs
is like comparing
apples and oranges.
Static budgets are
prepared for a single,
planned level of
activity.
Performance
evaluation is difficult
when actual activity
differs from the
planned level of
activity.

2. McGraw-Hill/Irwin
11-11-22
ConsiderConsider
the following the following
example from example from
the Cheesethe Cheese
Company . . . Company . . .
Hmm! Comparing
static budgets
with actual costs
is like comparing
apples and oranges.
Flexible Budgets

3. McGraw-Hill/Irwin
11-11-33
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor 40,000$
Indirect materials30,000
Power 5,000
Fixed costs
Depreciation 12,000
Insurance 2,000
Total overhead costs 89,000$
Static Budgets and
Performance Reports
U = Unfavorable variance
Cheese Company was
unable to achieve the
budgeted level of activity.

4. McGraw-Hill/Irwin
11-11-44
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor 40,000$ 34,000$ $6,000 F
Indirect materials30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,000 0
Total overhead costs 89,000$ 77,300$ $11,700 F
Static Budgets and
Performance Reports

5. McGraw-Hill/Irwin
11-11-55
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor 40,000$ 34,000$ $6,000 F
Indirect materials30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,000 0
Total overhead costs 89,000$ 77,300$ $11,700 F
F = Favorable variance since actual costs
are less than budgeted costs.
Static Budgets and
Performance Reports

6. McGraw-Hill/Irwin
11-11-66
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor 40,000$ 34,000$ $6,000 F
Indirect materials30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,000 0
Total overhead costs 89,000$ 77,300$ $11,700 F
Since cost variances are favorable, have
we done a good job controlling costs?
Static Budgets and
Performance Reports

7. McGraw-Hill/Irwin
11-11-77
I don’t think I can
answer this question
using a static budget.
I do know that
actual activity is below
budgeted activity which
is unfavorable.
But shouldn’t variable costs
be lower if actual activity
is below budgeted activity?
Static Budgets and
Performance Reports

8. McGraw-Hill/Irwin
11-11-88
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.
Static Budgets and
Performance Reports

9. McGraw-Hill/Irwin
11-11-99
Flexible Budgets
Central Concept
If you can tell me what your activity was
for the period, I will tell you what your costs and
revenue should have been.

10. McGraw-Hill/Irwin
11-11-1010
Preparing a Flexible Budget
To a budget for different activity
levels, we must know how costs behave
with changes in activity levels.
Total variable costs change
in direct proportion to
changes in activity.
Total fixed costs remain
unchanged within the
relevant range.
Fixed
Variable

11. McGraw-Hill/Irwin
11-11-1111
Advantages of 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.
Reveal variances due to good cost
control or lack of cost control.

12. McGraw-Hill/Irwin
11-11-1212
Preparing a Flexible Budget
Let’s prepare
budgets for the
Cheese Company.

13. McGraw-Hill/Irwin
11-11-1313
VariableTotal Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per HourCost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00
Indirect material3.00
Power 0.50
Total variable cost 7.50$
Fixed costs
Depreciation 12,000$
Insurance 2,000
Total fixed cost
Total overhead costs
Preparing a Flexible Budget

14. McGraw-Hill/Irwin
11-11-1414
VariableTotal Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per HourCost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00
Indirect material3.00
Power 0.50
Total variable cost 7.50$
Fixed costs
Depreciation 12,000$
Insurance 2,000
Total fixed cost
Total overhead costs
Preparing a Flexible Budget
Using an input activity measure
as units of output may not be
meaningful in a multiproduct firm.

15. McGraw-Hill/Irwin
11-11-1515
VariableTotal Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per HourCost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$
Indirect material3.00 24,000
Power 0.50 4,000
Total variable cost 7.50$ 60,000$
Fixed costs
Depreciation 12,000$
Insurance 2,000
Total fixed cost
Total overhead costs
Preparing a Flexible Budget
Variable costs are expressed as
a constant amount per hour.
In the original static budget,
indirect labor was $40,000 for
10,000 hours resulting in a rate
of $4.00 per hour.

16. McGraw-Hill/Irwin
11-11-1616
VariableTotal Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per HourCost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$
Indirect material3.00 24,000
Power 0.50 4,000
Total variable cost 7.50$ 60,000$
Fixed costs
Depreciation 12,000$
Insurance 2,000
Total fixed cost
Total overhead costs
Preparing a Flexible Budget
Fixed costs are expressed as a
total amount that does not
change within the relevant
range of activity.

17. McGraw-Hill/Irwin
11-11-1717
Preparing a Flexible Budget
VariableTotal Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per HourCost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$
Indirect material3.00 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$

18. McGraw-Hill/Irwin
11-11-1818
Preparing a Flexible Budget
VariableTotal Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per HourCost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$ 40,000$ 48,000$
Indirect material3.00 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$

19. McGraw-Hill/Irwin
11-11-1919
Preparing a Flexible Budget
VariableTotal Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per HourCost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$ 40,000$ 48,000$
Indirect material3.00 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$
Note: There is no flex
in the fixed costs.

20. McGraw-Hill/Irwin
11-11-2020
Preparing a Flexible Budget
VariableTotal Flexible Budgets
Cost Fixed 8,000 10,000 12,000
Per HourCost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$ 40,000$ 48,000$
Indirect material3.00 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$
Budgeted variable Total

overhead cost per activity

activity unit units

× +
Budgeted fixed
overhead cost
Total budgeted
overhead cost=

21. McGraw-Hill/Irwin
11-11-2121
Flexible Budget
Performance Report
Now let’s prepare a
budget performance report
at 8,000 actual machine
hours for the Cheese Co.

22. McGraw-Hill/Irwin
11-11-2222
Flexible Budget
Performance Report
VariableTotal
Cost FixedFlexible Actual
Per HourCostsBudget ResultsVariances
Machine hours 8,000 0
Variable costs
Indirect labor 4.00$ 34,000$
Indirect material3.00 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$

23. McGraw-Hill/Irwin
11-11-2323
Flexible Budget
Performance Report
VariableTotal
Cost FixedFlexible Actual
Per HourCostsBudget ResultsVariances
Machine hours 8,000 0
Variable costs
Indirect labor 4.00$ 34,000$
Indirect material3.00 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$
Original actual results for
Cheese Company that we saw
earlier.

24. McGraw-Hill/Irwin
11-11-2424
Flexible Budget
Performance Report
VariableTotal
Cost FixedFlexible Actual
Per HourCostsBudget ResultsVariances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor 4.00$ 34,000$
Indirect material3.00 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$
Flexible budget is
prepared for the
same activity level
(8,000 hours) as
actually achieved.

25. McGraw-Hill/Irwin
11-11-2525
Flexible Budget
Performance Report
VariableTotal
Cost FixedFlexible Actual
Per HourCostsBudget ResultsVariances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U
Indirect material3.00 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

26. McGraw-Hill/Irwin
11-11-2626
Flexible Budget
Performance Report
VariableTotal
Cost FixedFlexible Actual
Per HourCostsBudget ResultsVariances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U
Indirect material3.00 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
Indirect labor and
indirect material have
unfavorable variances
because actual costs
are more than the
flexible budget costs.

27. McGraw-Hill/Irwin
11-11-2727
Flexible Budget
Performance Report
VariableTotal
Cost FixedFlexible Actual
Per HourCostsBudget ResultsVariances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U
Indirect material3.00 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
Power has a favorable
variance because the
actual cost is less than
the flexible budget cost.

28. McGraw-Hill/Irwin
11-11-2828
End of Chapter 11
I’m here to your
budget. Are you ready to
ante up?