topic3b Flexble Budgeting- comprehensive

all about budgeting

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Lecture 10
Flexible Budgeting

2. Static Budgets and Overhead Performance
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
Actual costs are less than
budgeted costs.
Since cost variances are favorable, have we done a good job controlling costs?
How much of the favorable cost variance is due to lower activity, and how
much is due to “good cost control”?
U = Unfavorable variance
Company was unable to
achieve the budgeted level
of activity.
Static budgets are prepared
for a single, planned
level of activity.

3. Preparing a Flexible Budget
•To answer the question, we must FLEXFLEX the budget to the actual level of
activity.
•A flexible budget is a budget that adjusts or flexes for changes in the
volume of activity.l
• (8,000 hours) as actually achieved.
•
Let’s prepare
budgets
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$
If you can tell me
what your actual
level of activity for
the period, I will tell
you what your
costs and revenue
SHOULD have
been.

4. Preparing a Flexible Budget (cont)
1-4
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$
Variable costs are expressed as a constant amount per hour.
Fixed costs are expressed as a
total amount that does not
change within the relevant
range of activity. There is no
flex in the fixed costs.
Total budgeted
monthly
overhead cost
Budgeted variable
overhead cost per
activity unit
Total
activity
units
Budgeted fixed
overhead cost
per month
×= +

5. Flexible Budget Performance Report
1-5
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
Flexible budget is prepared
for the same activity level
(8,000 hours) as actually
achieved.
“cost variance due to bad cost control”