Flexible Budgets and Overhead Analysis

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Flexible Budgets and Overhead Analysis
Chapter 11
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Static Budgets and Performance Reports

• 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.
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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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Flexible Budgets
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Flexible Budgets

• Central Concept
• If you can tell me what your activity wasfor
  the period, I will tell you what your costs and
  revenue should have been.

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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
Cost
Total
Flexible Budgets
Formula
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


?


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Quick Check ?

• What should be the total overhead costs for the
  Flexible Budget at 10,000 hours?
• a. 92,500.
• b. 74,000.
• c. 89,000.
• d. 94,000.

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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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Preparing a Flexible Budget
CheeseCo
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Flexible BudgetPerformance Report
Lets prepare a budget
performance report for CheeseCo.
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Flexible BudgetPerformance Report
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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 BudgetPerformance Report
CheeseCo
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Quick Check ?

• What is the variance for indirect materials
  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 BudgetPerformance Report
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Quick Check ?

• What is the variance for depreciation when the
  flexible budget for 8,000 hours is compared to
  the actual results?
• a. 0
• b. 1,000 F
• c. 2,000 U
• d. 2,000 F

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Flexible BudgetPerformance Report
CheeseCo
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Flexible BudgetPerformance Report
Remember the question How much of the total
variance is due to activityand how much is due
tocost control?
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Static Budgets and Performance
How much of the 11,650 is due to activity and
how much is due to cost control?
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Flexible BudgetPerformance Report
Overhead Variance Analysis
Lets place the flexible budget for 8,000 hours
here.
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Flexible BudgetPerformance Report
Overhead Variance Analysis
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Flexible BudgetPerformance Report