Ch13. Flexible Budget

8/9/2019 Ch13. Flexible Budget

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Flexible BudgetingFlexible BudgetingChapter 13


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Manufacturing OverheadManufacturing Overhead

CostsCostsAre not traceable to individual products.

They are a pool of many dierent ind ofcosts !ith dierent relationship toproductive activity "variable vs. #xed$.

%ierent individuals responsible fordierent type of overhead costs.


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Overhead BudgetsOverhead Budgets&ince overhead costs are not

traceable to products !e can't setstandards for them.

Flexible Budgets ( not based on onlyone level of activity) but covers arange of activity.

&tatic Budget ( based on a particularlevel of activity.


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&tatic BudgetActivity"machine hours$ *)+,,

Budgetedelectricity cost -)*+,

A static budget is

based on only oneanticipated activitylevel.

A static budget isbased on only oneanticipated activity

level.

Flexible Budget

/),,, *)+,, 0),,,

-),,,-)*+,-1)+,,

A flexible budget

includes severalpossible activitylevels.

A flexible budgetincludes severalpossible activity

levels.

Static Budget Versus Flexible BudgetStatic Budget Versus Flexible Budget

Notice that the static budget and the fexiblebudget are the same (in this example) when

machine activity is 7,500 machine hours.

Electricity - $.50 per machine hour


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&tatic budgets are prepared for asingle) planned levelof activity.

2erformance evaluation isdi3cult !hen actual activity

diersfrom the activityoriginally budgeted.

Flexible BudgetingFlexible Budgeting

Hmm! Comparin

costs at dierentlevels o activityis li"e comparin

apples #ith oranes.

Consider the following

condensed examplefrom Barton, Inc. . . .

Consider the followingcondensed examplefrom Barton, Inc. . . .


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Flexible BudgetingFlexible BudgetingPrepared for an expected activity of

10000 units but actual activity for the

period was only 000 units


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! " !nfavorable variance# Barton,Inc. was unable to achieve the

budgeted level of activity.


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$ " $avorable variance%actual costs

are less than budgeted costs.

&ince cost variances are favorable, havewe done a good 'ob controlling costs(


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don%t thin" canans#er this &uestion

usin a static budet.

do "no# thatactual activity is belo#budeted activity #hich

is unavorable.'ut shouldn%t variable costs

be lo#er i actual activityis belo# budeted activity(

&tatic Budgets and&tatic Budgets and

2erformance 4eports2erformance 4eports


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The relevant 5uestion is . . .

67o! much of the favorable costvariance is

due to lo!er activity) and ho! muchis due to good cost control89

To ans!er the 5uestion)

!e mustthe budget to theactual level of activity.

&tatic Budgets and&tatic Budgets and

2erformance 4eports2erformance 4eports


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)ay be prepared or any activitylevel in the relevant rane.

*ho# e+penses that shouldhave occurred at the actual

level o activity.

,eveal variances due to costcontrol or lac" o cost control.


)anagers can locate possible

problem areas by examining thevariances revealed on aperformance report that comparesbudgeted costs for the actual levelof activity to the actual costs forthe same level.


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Flexible BudgetsFlexible Budgets

for 2lanning and Controlfor 2lanning and Control

tatic budgets

Masterbudget

>ital for planning

?ess useful forcontrol

%eveloped arounda single level of

activityBudgeted activity

level rarely e5ualsactual activity

!lexible budgets

Variable budget

2rovides

expected costsfor a range ofactivity

2rovidesbudgeted costsfor the actualactivity level


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Flexible BudgetsFlexible Budgets

Central Concept

@f you can tell me !hat your activity!as

for the period) @ !ill tell you !hat yourcosts and revenue should have been.


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To a budget for dierent activitylevels) !e must no! ho! costsbehave !ith changes in activity levels.

Total variable costschangein direct proportion tochanges in activity.

Total #xed costs remain

unchanged!ithin therelevant range. i+ed.a

riable


/3-15


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*et+sprepare budgetsfor Barton,Inc

.



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Flexible BudgetFlexible Budget

hat are the three steps to prepare aflexible budget(

!sing the per-unit costs for each element, prepare a budgetshowing what costs are expected to be incurred at severalpoints within the relevant range.

naly/e the pro'ected manufacturing costs for the comingperiod.

etermine a relevant range over which production is expected tovary during the coming period.


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Cost otal $lexible Budgets

$ormula $ixed ,000 10,000 12,000

Per 3our Cost 3ours 3ours 3ours

!nits of ctivity ,000 10,000 12,000

4ariable costs Indirect labor 5.00 62,0007

Indirect material 6.00 25,000

Power 0.80 5,000

otal variable cost 9.807 :0,0007

$ixed costs epreciation 12,0007

Insurance 2,000

otal fixed cost

otal overhead costs

4ariable costs are expressed as a constant

amount per hour.In the original budget, indirect labor was750,000 for 10,000 hours resulting in a rate

of 75.00 per hour.

4ariable costs are expressed as a constant

amount per hour.In the original budget, indirect labor was750,000 for 10,000 hours resulting in a rate

of 75.00 per hour.

$ixed costs are expressed as atotal amount that does notchangewithin the relevant

range of activity.


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$ormula $ixed ,000 10,000 12,000


!nits of ctivity ,000 10,000 12,000

4ariable costs Indirect labor 5.00 62,0007 50,0007 5,0007

Indirect material 6.00 25,000 60,000 6:,000

Power 0.80 5,000 8,000 :,000

otal variable cost 9.807 :0,0007 98,0007 ;0,0007

$ixed costs epreciation 12,0007 12,0007 12,0007 12,0007

Insurance 2,000 2,000 2,000 2,000

otal fixed cost 15,0007 15,0007 15,0007

otal overhead costs 95,0007 ;,0007 105,0007


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$ormula $ixed ,000 10,000 12,000


!nits of ctivity ,000 10,000 12,000

4ariable costs Indirect labor 5.00 62,0007 50,0007 5,0007

Indirect material 6.00 25,000 60,000 6:,000

Power 0.80 5,000 8,000 :,000

otal variable cost 9.807 :0,0007 98,0007 ;0,0007

$ixed costs epreciation 12,0007 12,0007 12,0007 12,0007

Insurance 2,000 2,000 2,000 2,000

otal fixed cost 15,0007 15,0007 15,0007

otal overhead costs 95,0007 ;,0007 105,0007


otal variable cost " 79.80 per unit < budget level in unitsotal variable cost " 79.80 per unit < budget level in units


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$ixed costs are expressed as a totalamount that does not change within the

relevant range of activity.=ote% here is no flexin the fixed costs.


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!lexible budgetper"ormancereport

Compare budgeted

costs given the actuallevel of activity to the

actual costs for thesame level

?ocate possible

problem areas byexamining the fexible

budget variances

xamines e3ciency

#anagerialper"ormancereport Flexible budget

variances

( Actual results vs.exible budget

( xamines e3ciency

>olume variances

(&tatic budget vs.exible budget

( xamineseectiveness


2erformance 4eport2erformance 4eport


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=owlet+sprepareabudgetperformancereport

at,000actualmachine

hours


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$lexible budget is preparedfor the same activity level

>,000 hours? as actuallyachieved.


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2erformance 4eport2erformance 4eportCost otal

$ormula $ixed $lexible ctual

Per 3our Costs Budget @esults 4ariances

!nits of ctivity ,000 ,000 0

4ariable costs Indirect labor 5.007 62,0007 65,0007 7 2,000 !

Indirect material 6.00 25,000 28,800 1,800 !

Power 0.80 5,000 6,00 200 $

otal variable costs 9.807 :0,0007 :6,6007 7 6,600 !

$ixed Costs epreciation 12,0007 12,0007 12,0007 0

Insurance 2,000 2,000 2,000 0

otal fixed costs 15,0007 15,0007 0

otal overhead costs 95,0007 99,6007 7 6,600 !


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Cost otal






Power 0.80 5,000 6,00 200 $



Insurance 2,000 2,000 2,000 0



Indirect labor and indirect

material have large unfavorablevariances because actual costs

are more than the flexiblebudget costs.



hese variances are due to cost

control issues because we haveremoved the activity differencesby flexing the original budgetfrom 10,000 units down to theactual activity of ,000 units.


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Cost otal






Power 0.80 5,000 6,00 200 $



Insurance 2,000 2,000 2,000 0



Power has a favorable variancebecause the actual cost is lessthan the flexible budget cost.

Power has a favorable variancebecause the actual cost is lessthan the flexible budget cost.



i+ed costs remain unchaned so the totaloverhead variance is $3300 unavorable.o# #e have a better indication on overhead

cost control at 'arton.

i+ed costs remain unchaned so the totaloverhead variance is $3300 unavorable.o# #e have a better indication on overhead

cost control at 'arton.


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@emembertheAuestion%3owmuchofthetotalvarianceisduetoactivity

andhowmuchisduetocostcontrol(C




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Flexible BudgetingFlexible Budgeting3ow much of the 711,900 is due to activity

and how much is due to cost control(


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ifference between original static budgetand actual overhead " 711,900 $.

Dverhead 4ariance nalysis

*et+s placethe flexible

budget for,000 hours

here.


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his 718,000$ variance isdue to lower activity.

Dverhead 4ariance nalysis

ctivity

his 76,600! flexiblebudget variance is dueto poor cost control.

Cost control


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2hat causes

the costcontrol variance(

here are t#o primaryreasons or unavorablevariable overhead variances4

1. *pendintoo much or

resources./. sin the resources ineiciently.

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Ch13. Flexible Budget

Text of Ch13. Flexible Budget