Flexible Budgets and Overhead Analysis

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Flexible Budgets and Overhead Analysis

• Chapter Eleven

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Static Budgets and Performance Reports

• Static budgetsare prepared fora single,
  plannedlevel of activity.

Performance evaluation is difficult when
actual activity differs from the planned level of
activity.
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Flexible Budgets
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Static Budgets and Performance Reports
CheeseCo
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Static Budgets and Performance Reports
CheeseCo
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Static Budgets and Performance Reports
CheeseCo
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Static Budgets and Performance Reports
CheeseCo
F Favorable variance that occurs when actual
costs are less than budgeted costs.
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Static Budgets and Performance Reports
CheeseCo
Since cost variances are favorable, havewe done
a good job controlling costs?
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Static Budgets and Performance Reports
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Static Budgets and Performance Reports

• 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 mustthe budget to
  theactual level of activity.

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Preparing a Flexible Budget

• To a budget we need to know that
• Total variable costs changein direct proportion
  to changes in activity.
• Total fixed costs remainunchanged within
  therelevant range.

Variable
Fixed
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Preparing a Flexible Budget
Lets prepare budgets
for CheeseCo.
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Preparing a Flexible Budget
CheeseCo
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Preparing a Flexible Budget
CheeseCo
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Preparing a Flexible Budget
CheeseCo
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Preparing a Flexible Budget
CheeseCo
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Quick Check ?

• What should be the total overhead costs for the
  Flexible Budget at 12,000 hours?
• a. 92,500.
• b. 89,000.
• c. 106,800.
• d. 104,000.

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Quick Check ?

• What should be the total overhead costs for the
  Flexible Budget at 12,000 hours?
• a. 92,500.
• b. 89,000.
• c. 106,800.
• d. 104,000.

Total overhead cost 14,000
7.50 per hour ? 12,000 hours
14,000 90,000 104,000
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Preparing a Flexible Budget
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Flexible Budget Performance Report
Lets prepare a budget
performance report for CheeseCo.
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Flexible Budget Performance Report
CheeseCo
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Quick Check ?

• What is the variance for indirect labor when
  the flexible budget for 8,000 hours is compared
  to the actual results?
• a. 2,000 U
• b. 2,000 F
• c. 6,000 U
• d. 6,000 F

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Quick Check ?

• What is the variance for indirect labor when
  the flexible budget for 8,000 hours is compared
  to the actual results?
• a. 2,000 U
• b. 2,000 F
• c. 6,000 U
• d. 6,000 F

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Flexible Budget Performance Report
CheeseCo
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Quick Check ?

• What is the variance for indirect material when
  the flexible budget for 8,000 hours is compared
  to the actual results?
• a. 1,500 U
• b. 1,500 F
• c. 4,500 U
• d. 4,500 F

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Quick Check ?

• What is the variance for indirect material when
  the flexible budget for 8,000 hours is compared
  to the actual results?
• a. 1,500 U
• b. 1,500 F
• c. 4,500 U
• d. 4,500 F

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Flexible Budget Performance Report
CheeseCo
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Flexible Budget Performance Report
Remember the question How much of the total
variance is due to lower activity and how much
isdue to cost control?
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Static Budgets and Performance
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Flexible Budget Performance Report
Overhead Variance Analysis
Lets place the flexible budget for 8,000 hours
here.
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Flexible Budget Performance Report
Overhead Variance Analysis
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The Measure of Activity A Critical Choice
Three importantfactors in selecting anactivity
base for an overheadflexible budget
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Variable Overhead Variances A Closer Look
If flexible budgetis based onactual hours
If flexible budgetis based onstandard hours
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Variable Overhead Variances Example

• ColaCos actual production for the period
  required 3,200 standard machine hours. Actual
  variable overhead incurred for the period was
  6,740. Actual machine hours worked were 3,300.
  The standard variable overhead cost per machine
  hour is 2.00.
• Compute the variable overhead spending variance
  first using actual hours. Then use standard
  hours allowed to calculate the variable
  overheadefficiency variance.

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Variable Overhead Variances
Actual Flexible Budget
Variable for
Variable Overhead
Overhead at Incurred
Actual Hours
AH SR
AH AR
AH Actual hoursAR Actual variable
overhead rateSR Standard variable
overhead rate
Spending Variance
Spending variance AH(AR SR)
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Variable Overhead Variances Example
Actual Flexible Budget
Variable for
Variable Overhead
Overhead at Incurred
Actual Hours
3,300 hours2.00 per hour 6,600
6,740
Spending Variance 140 unfavorable
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Variable Overhead Variances A Closer Look

• Spending Variance

Results from paying moreor less than expected
foroverhead items and from excessive usage
ofoverhead items.
Now, lets use the standard hours allowed, along
with the actual hours, to compute the efficiency
variance.
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Variable Overhead Variances
Actual Flexible Budget
Flexible Budget Variable
for Variable for Variable
Overhead Overhead at
Overhead at Incurred
Actual Hours
Standard Hours
AH SR
AH AR
SH SR
Spending Variance
EfficiencyVariance
Spending variance AH(AR - SR) Efficiency
variance SR(AH - SH)
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Variable Overhead Variances Example
Actual Flexible Budget
Flexible Budget Variable
for Variable for Variable
Overhead Overhead at
Overhead at Incurred
Actual Hours
Standard Hours
3,300 hours
3,200 hours
2.00 per hour
2.00 per hour
6,740
6,600
6,400
Spending variance140 unfavorable
Efficiency variance200 unfavorable
340 unfavorable flexible budget total variance
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End of Chapter 11