Description
This is a presentation describes how to prepare flexible budgets.
Flexible Budgets and Overhead Analysis
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.
Hmm! Comparing static budgets with actual costs is like comparing apples and oranges.
Flexible Budgets
May be prepared for any activity level in the relevant range.
Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons.
Reveal variances related to cost control.
Improve performance evaluation.
Let’s look at CheeseCo.
Static Budgets and Performance Reports
CheeseCo
Static Budgets and Performance Reports
CheeseCo
Static Budgets and Performance Reports
CheeseCo
U = Unfavorable variance CheeseCo was unable to achieve the budgeted level of activity.
Static Budgets and Performance Reports
CheeseCo
F = Favorable variance that occurs when actual costs are less than budgeted costs.
Static Budgets and Performance Reports
CheeseCo
Since cost variances are favorable, have we done a good job controlling costs?
Static Budgets and Performance Reports
I don’t think I can answer the question using a static budget. Actual activity is below budgeted activity.
So, shouldn’t variable costs be lower if actual activity is lower?
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 must the budget to the actual level of activity.
Preparing a Flexible Budget
To a budget we need to know that:
– Total variable costs change in direct proportion to changes in activity. – Total fixed costs remain unchanged within the relevant range.
Fixed
Preparing a Flexible Budget
Preparing a Flexible Budget
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 12,000
Variable costs are expressed as a constant amount per hour.
$40,000 ÷ 10,000 hours is $4.00 per hour.
$ 12,000 2,000
$
Fixed costs are expressed as a total amount.
Preparing a Flexible Budget
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ 32,000 24,000 4,000 $ 60,000 10,000 12,000
$
Fixed costs $4.00 Depreciation Insurance Total fixed cost Total overhead costs
per hour × 8,000 hours = $32,000
Preparing a Flexible Budget
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ 32,000 24,000 4,000 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000 10,000 12,000
$
Preparing a Flexible Budget
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 4.00 $ 32,000 3.00 24,000 Total fixed costs 0.50 4,000 do not change in 7.50 $ 60,000 $ 12,000 2,000 $ 12,000 2,000 $ 14,000 $ 74,000 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 12,000 2,000 $ 14,000 $ 89,000 12,000
$
the relevant range.
?
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.
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
Preparing a Flexible Budget
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ 32,000 24,000 4,000 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 12,000 2,000 $ 14,000 $ 89,000 12,000 $ 48,000 36,000 6,000 $ 90,000 $ 12,000 2,000 $ 14,000 $ 104,000
$
Flexible Budget Performance Report
Flexible Budget Performance Report CheeseCo
Flexible budget Cost is prepared for the Formula per Hour same activity level (8,000 hours) as Machine hours actually achieved. Variable costs
Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budget 8,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350 Variances 0
$
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
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
Flexible Budget Performance Report CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budget 8,000 $ 32,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350 Variances 0 $ 2,000 U
$
Flexible Budget Performance Report
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budget 8,000 $ 32,000 24,000 4,000 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350 Variances 0 $ 2,000 U 1,500 U 200 F $ 3,300 U $ 0 50 U 50 U $ 3,350 U
$
Flexible Budget Performance Report
Static Budgets and Performance How much of the $11,650 favorable variance is due to
lower activity and how much is due to cost control?
Flexible Budget Performance Report
Overhead Variance Analysis
Static Overhead Budget at 10,000 Hours $ 89,000
Let’s place the flexible budget for 8,000 hours here.
Actual Overhead at 8,000 Hours $ 77,350
Difference between original static budget and actual overhead = $11,650 F.
Flexible Budget Performance Report
Overhead Variance Analysis
Static Overhead Budget at 10,000 Hours $ 89,000 Flexible Overhead Budget at 8,000 Hours $ 74,000 Actual Overhead at 8,000 Hours $ 77,350
Activity This $15,000F variance is due to lower activity.
Cost control This $3,350U variance is due to poor cost control.
doc_977027541.ppt
This is a presentation describes how to prepare flexible budgets.
Flexible Budgets and Overhead Analysis
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.
Hmm! Comparing static budgets with actual costs is like comparing apples and oranges.
Flexible Budgets
May be prepared for any activity level in the relevant range.
Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons.
Reveal variances related to cost control.
Improve performance evaluation.
Let’s look at CheeseCo.
Static Budgets and Performance Reports
CheeseCo
Static Budgets and Performance Reports
CheeseCo
Static Budgets and Performance Reports
CheeseCo
U = Unfavorable variance CheeseCo was unable to achieve the budgeted level of activity.
Static Budgets and Performance Reports
CheeseCo
F = Favorable variance that occurs when actual costs are less than budgeted costs.
Static Budgets and Performance Reports
CheeseCo
Since cost variances are favorable, have we done a good job controlling costs?
Static Budgets and Performance Reports
I don’t think I can answer the question using a static budget. Actual activity is below budgeted activity.
So, shouldn’t variable costs be lower if actual activity is lower?
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 must the budget to the actual level of activity.
Preparing a Flexible Budget
To a budget we need to know that:
– Total variable costs change in direct proportion to changes in activity. – Total fixed costs remain unchanged within the relevant range.
Fixed
Preparing a Flexible Budget
Preparing a Flexible Budget
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 10,000 12,000
Variable costs are expressed as a constant amount per hour.
$40,000 ÷ 10,000 hours is $4.00 per hour.
$ 12,000 2,000
$
Fixed costs are expressed as a total amount.
Preparing a Flexible Budget
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ 32,000 24,000 4,000 $ 60,000 10,000 12,000
$
Fixed costs $4.00 Depreciation Insurance Total fixed cost Total overhead costs
per hour × 8,000 hours = $32,000
Preparing a Flexible Budget
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ 32,000 24,000 4,000 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000 10,000 12,000
$
Preparing a Flexible Budget
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 4.00 $ 32,000 3.00 24,000 Total fixed costs 0.50 4,000 do not change in 7.50 $ 60,000 $ 12,000 2,000 $ 12,000 2,000 $ 14,000 $ 74,000 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 12,000 2,000 $ 14,000 $ 89,000 12,000
$
the relevant range.
?
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.
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
Preparing a Flexible Budget
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budgets 8,000 10,000 12,000 Hours Hours Hours 8,000 $ 32,000 24,000 4,000 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000 10,000 $ 40,000 30,000 5,000 $ 75,000 $ 12,000 2,000 $ 14,000 $ 89,000 12,000 $ 48,000 36,000 6,000 $ 90,000 $ 12,000 2,000 $ 14,000 $ 104,000
$
Flexible Budget Performance Report
Flexible Budget Performance Report CheeseCo
Flexible budget Cost is prepared for the Formula per Hour same activity level (8,000 hours) as Machine hours actually achieved. Variable costs
Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budget 8,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350 Variances 0
$
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
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
Flexible Budget Performance Report CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budget 8,000 $ 32,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350 Variances 0 $ 2,000 U
$
Flexible Budget Performance Report
CheeseCo
Cost Formula per Hour Machine hours Variable costs Indirect labor Indirect material Power Total variable cost Fixed costs Depreciation Insurance Total fixed cost Total overhead costs $ 4.00 3.00 0.50 7.50 $ 12,000 2,000 Total Fixed Cost Flexible Budget 8,000 $ 32,000 24,000 4,000 $ 60,000 $ 12,000 2,000 $ 14,000 $ 74,000 Actual Results 8,000 $ 34,000 25,500 3,800 $ 63,300 $ 12,000 2,050 $ 14,050 $ 77,350 Variances 0 $ 2,000 U 1,500 U 200 F $ 3,300 U $ 0 50 U 50 U $ 3,350 U
$
Flexible Budget Performance Report
Static Budgets and Performance How much of the $11,650 favorable variance is due to
lower activity and how much is due to cost control?
Flexible Budget Performance Report
Overhead Variance Analysis
Static Overhead Budget at 10,000 Hours $ 89,000
Let’s place the flexible budget for 8,000 hours here.
Actual Overhead at 8,000 Hours $ 77,350
Difference between original static budget and actual overhead = $11,650 F.
Flexible Budget Performance Report
Overhead Variance Analysis
Static Overhead Budget at 10,000 Hours $ 89,000 Flexible Overhead Budget at 8,000 Hours $ 74,000 Actual Overhead at 8,000 Hours $ 77,350
Activity This $15,000F variance is due to lower activity.
Cost control This $3,350U variance is due to poor cost control.
doc_977027541.ppt