chapter13handout

8/7/2019 Chapter13Handout

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Flexible budgets

Chapter 13

Dr. Pinar Guven-Uslu

Norwich Business School, UEA


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S tatic Budgets and Performance Reports

S tatic budgets areprepared for a single,

planned level of activity.

Performance evaluation isdifficult when actual

activity differs from theplanned level of activity.

.


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Static ActualBudget Results Variances

Machine hours 10,000 8,000Variable costs

Ind irect labour 40,000 34,000Indirect materials 30,000 25,500Power 5,000 3,800

Fixed costsDepreciation 12,000 12,000Insurance 2,000 2,050

Total overhead costs 89,000 77,350


CheeseCo


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The relevant question is . . .

How much of the favourable cost

variance is due to lower activity, and howmuch is due to good cost control?


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Flexible Budgets

Improve performance evaluation.

May be prepared for any activitylevel in the relevant range.

Show revenues and expensesthat should have occurred at theactual level of activity.

Reveal variances due to good costcontrol or lack of cost control.


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Preparing a Flexible Budget

Total variable costs change

in direct proportion tochanges in activity.

Total fixed costs remainunchanged within the

relevant range. F ixed

To a budget we need t o kno w that:


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Cost Total Flexible BudgetsFormula Fixed 8,000 10,000 12,000Per Hour Cost Hours Hours Hours

Machine hours 8,000 10,000 12,000

Variable costsIndirect labour 32,000Indirect material 24,000Power 4,000

Total variable cost

Fixed costsDepreciation Insurance

Total fixed costTotal overhead costs


Fixed costs areexpressed as atotal amount.

Variable costs are expressed asa constant amount per hour.

Calculate these amounts

CheeseCo


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Flexible Budget

Performance Report


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Cost TotalFormula Fixed Flexible ActualPer Hour Costs Budget Results Variances

Machine hours 8,000 8,000 0

Variable costsIndirect labour 4.00 32,000 34,000Indirect material 3.00 24,000 25,500Power 0.50 4,000 3,800

Total variable costs 7.50 60,000 63,300

Fixed ExpensesDepreciation 12,000 12,000 12,000Insurance 2,000 2,000 2,050

Total fixed costs 14,000 14,050Total overhead costs 74,000 77,350

Flexible BudgetPerformance Report

CheeseCo

Flexible budget isprepared for the

same activity level(8,000 hours) as

actually achieved.

Calculate thevariances


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Cost TotalFormula Fixed Flexible ActualPer Hour Costs Budget Results Variances

Machine hours 8,000 8,000 0

Variable costsIndirect labour 4.00 32,000 34,000Indirect material 3.00 24,000 25,500Power 0.50 4,000 3,800

Total variable costs 7.50 60,000 63,300

Fixed ExpensesDepreciation 12,000 12,000 12,000Insurance 2,000 2,000 2,050

Total fixed costs 14,000 14,050Total overhead costs 74,000 77,350


CheeseCoFlexible budget isprepared for the

same activity level(8,000 hours) as

actually achieved.


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Static ActualBudget Results Variances

Machine hours 10,000 8,000 2,000 UVariable costs

Indirect labour 40,000 34,000 6,000 FIndirect materials 30,000 25,500 4,500 FPower 5,000 3,800 1,200 F

Fixed costsDepreciation 12,000 12,000 0Insurance 2,000 2,050 50 U

Total overhead costs 89,000 77,350 11,650 F

S tatic Budgets and PerformanceHow much of the 11,650 is due to activityand how much is due to cost control?


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Flexible Budget

Performance Report

Calculate total overhead variance. How much isdue to change in activity and how much is due

to change in planned costs?

Overhead Variance Analysis

tatic ActualOverhead Overhead

udget at atHours Hours

Flexible

budget


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Flexible Budget

Performance Report

Difference between original static budgetand actual overhead = 11,650 F.

Overhead Variance Analysis

tatic ActualOverhead Overhead

udget at at10,000 ours ,000 ours

,000 , 50

Lets place

the flexiblebudget for ,000 hours

here.


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Flexible Budget Performance Report

W hat causesthe cost

control variance?

There are two primaryreasons for unfavourablevariable overhead variances:

1. Spending too much for resources.

2. Using the resourcesinefficiently .

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