2. FLEXIBLE BUDGET Pertemuan 8 dan 9 Matakuliah: > Tahun: >

3. Bina Nusantara University 3 LEARNING OBJECTIVE Explain flexible budgeting and prepare a flexible budget. Compute and explain the meaning of spending and idle capacity variances. Prepare variance report

4. Bina Nusantara University 4 Preparing a Flexible Budget Before a flexible budget is prepared, a formula is needed to describe each account within each department or cost center. Each formula indicates the fixed cost and/or variable cost rate for the account. The variable portion of the formula is a rate of cost in relation to some measure of activity. Such as labor hours, machine hours, or units of production. The fixed amount and the variable rate constant in relevant range.

5. Bina Nusantara University 5 Evaluating Performances These variances are used in evaluating performances of each department or cost center : Spending Variance is the difference between actual cost and the budget allowance ( a budget adjusted to reflect the actual level of activity). If the budget allowance is a reasonable estimate of what should have been spent for the actual level of activity experienced, the spending variance can be viewed as a measure of efficiency.

6. Bina Nusantara University 6 Evaluating Performances Idle capacity variance is the difference between the budget allowance for actual activity and the amount of cost changed, at a predetermined rate, to products manufactured during the period or to user department for services rendered. It is a measure of capacity use because it is driven by the difference between the activity level used to compute the predetermined overhead rate and the activity level actually experienced.

7. Bina Nusantara University 7 favorable or unfavorable a variance is referred to as favorable or unfavorable depending on whether it has a favorable or unfavorable effect on income and owner’s equity. In either case, over applied overhead decrease the cost of goods sold in the current period, which in turn increase income and owner’s equity. Because it has a positive effect on income and owner’s equity, over applied overhead is said to be favorable.

8. Bina Nusantara University 8 favorable or unfavorable In contrast, the excess of actual overhead over the amount applied to production ( under applied overhead ) increases cost of goods sold and decreases income and owner’s equity. Because it has a negative effect on income and owner’s equity, under applied overhead is said to be unfavorable. Because spending and idle capacity variance are parts of over or under applied overhead, they too affect income.

9. Bina Nusantara University 9 Usefulness of Flexible Budget Historically the flexible budget was used mainly to control department factory overhead. Now, however, flexible budget are prepared for marketing, administrative, and manufacturing cost. The flexible budget is also useful in planning, because it provides cost behavior information that can be used to evaluate the effects that different activity levels have on profits and cash flows and to establish the periodic budget.

10. Bina Nusantara University 10 Usefulness of Flexible Budget Any increase or decrease in business activity affects the entire enterprise. In some activities or departments, change will be greater than in others. Certain departments can increase production without much additional cost. In others, cost increase or decrease in proportion to production. Flexible budget reflect these realities.

11. Bina Nusantara University 11 A Variance Report A Variance report can be prepared by computing the budget allowance for actual activity and comparing it to both actual overhead and applied overhead. To provide a detailed report to operating management, the spending variance is computed for each item of overhead by subtracting the item’s flexible budget amount from the item’s actual cost. The idle capacity variance is computed by subtracting applied overhead from the total budget allowance.

12. Bina Nusantara University 12 Example refers to reference The total spending variance plus the idle capacity variance equals the amount of over or under applied factory overhead for the period, as follows : Actual factory overhead cost ………… $ 30,775.75 Applied factory overhead …………….. $ 32,250.00 Over applied factory overhead ……… $(1,474.25)

13. Bina Nusantara University 13 Example refers to reference Spending variance ………… $ 475.75 unfavorable Idle Capacity variance …….. (1,950.00) favorable Over applied factory overhead $ 1,474.25) Read more, preparing a variance report on part 4, chapter 17, page 17-16 till 17-18

14. Bina Nusantara University 14 Example refers to reference In such cases, better cost control and more meaningful products cost data result when accountants use more than one overhead rate. Because using multiple rates within a department is costly, the expected benefit should be weighed against the cost gathering and providing the information. However, if responsibility reports are to be used for performance evaluation and cost control.

15. Bina Nusantara University 15 Example refers to reference It is essential that cost be highly correlated with the activity used in calculating the budget allowance. Otherwise, the budget allowance will be in many cases only when multiple activities are used calculate multiple overhead rates.

16. Bina Nusantara University 16 CONCLUSION Flexible budget gives a lot of information to management, to help the management in making an important decisions about the company strategic planning in future. A variance report shows over or under applied factory overhead.