1. Flexible Budgets and Overhead Analysis
Management Accounting: The Cornerstone for Business Decisions
Chapter 10
Flexible Budgets and Overhead Analysis
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

2. Learning Objectives
Prepare a flexible budget and use it for performance reporting.
Calculate the variable overhead variances and explain their meaning.
Calculate the fixed overhead variances and explain their meaning.
Prepare an activity-based flexible budget.

3. Illustrate Static and Flexible Budget Variances

4. How to prepare a performance report based on a static budget (using budgeted production).
10-1
For Quarter 2
Relationships from the Master Budget Actual Data
Budgeted production units 1,590
Production units
1,800
Materials:
Materials cost:
$ 6,570.00
1 plain $3.00
5 ounces of $0.20
Labor:
Labor cost:
$ 2,250.00
0.12 $10.00

5. How to prepare a performance report based on a static budget (using budgeted production).
10-1
For Quarter 2
Relationships from the Master Budget Actual Data
Variable overhead
Maintenance
Maintenance: $
Power $1.25
Power $
Fixed overhead
Grounds keeping: $1,105 per qtr.
Grounds keeping
$ 1,055.00
Depreciation: $540 per qtr.
Depreciation $
REQUIRED: Prepare a performance report using a budget based on expected production.
Calculation: Appears on next slide.

6. How to prepare a performance report based on a static budget (using budgeted production).
10-1
Actual
Budgeted
Variance
Units
1,590
1,800
DM cost
$ 6,360.00
$ 6,570.00
DL cost
1,908.00
2,250.00
Overhead:
Variable:
Maintenance
715.50
802.50
Power
238.50
255.00
Fixed:
Grounds Keeping
1,105.00
1,055.00
Depreciation
540.00
Total
$ 10,867.00
$ 11,472.50

7. Define the two types of flexible budgets.
Before-the-fact
After-the-fact

8. How to prepare a flexible production budget.
10-2
Levels of activity 1,100 1,300 1,500
Materials:
1 plain $3.00
5 ounces of $0.20
Labor:
0.12 $10.00
Variable overhead
Maintenance
Power $1.25
Fixed overhead
Grounds keeping: $1,105 per qtr.
Depreciation: $540 per qtr.
Required: Prepare a budget for three levels of output: 1,100, 1,300, 1,500 units
Calculation: Appears on the following slide

9. How to prepare a flexible production budget.
10-2
Variable Cost
Range of Production
per Unit
units
Units
DM cost
DL cost
Overhead:
Variable:
Mainten.
Power
Tot var cost
Remainder on following slide

10. How to prepare a flexible production budget.
10-2
Fixed:
Grds Kp
Deprec
Total fix cost
Total prod cost

11. How to prepare a performance report using a flexible budget.
10-3
Budgeted costs for the actual level of activity are calculated using the rates from Cornerstone 10-2 and the activity from Cornerstone 10-1, actual costs come from Cornerstone 10-1.
REQUIRED: Prepare a performance report using budgeted costs for the and the actual level of activity.
Calculations: Appears on the following slide.

12. How to prepare a performance report using a flexible budget.
10-3
Actual
Budgeted
Variance
Units
1,800
DM cost
$ 6,570.00
$ ,200
DL cost
2,250.00
2,160.00
Overhead:
Variable:
Maintenance
802.50
810.00
Power
255.00
270.00
Fixed:
Grounds Keeping
1,105.00
1,055.00
Depreciation
540.00
Total
$ 11,522.50
$ 12,035.00

13. How to calculate the total variable overhead variance.
10-4
Standard variable overhead rate (SVOR) $5.00 DLH
Actual variable overhead costs 200 hrs.
$4.70 (AVOR)
Standard rate allowed per unit 0.12 hr
Actual production 1,600 units
REQUIRED: Calculate the total variable overhead variance
Calculation:

14. How to calculate the variable overhead variances: columnar and formula approaches.
10-5
Standard variable overhead rate (SVOR) $5.00 DLH
Actual variable overhead rate (AVOR) $4.70
Actual hours worked (AH) 200 hrs
Number of t-shirts produced 1,600 units
Hours allowed for production (SH) 192 hrs
REQUIRED: Calculate the variable overhead spending and efficiency variances
Calculation: Columnar appears on next slide.
VOH Spending Variance
VOH Efficiency Variance

15. How to calculate the total variable overhead variance.
10-5

16. How to prepare a performance report for the variable overhead variances.
10-6
Standard variable overhead rate (SVOR) $5.00 DLH
Actual costs:
Maintenance $715
Power $225
Actual hours worked (AH) hrs
Number of t-shirts produced 1,600 units
Variable overhead:
Maintenance 0.12 $3.75
Power 0.12 $1.25
REQUIRED: Prepare a performance report that shows the variances on an item-by-item basis.
Calculation: Appears on the following slide.

17. How to prepare a performance report for the variable overhead variances.
10-6
Budget for
Cost
Actual
Spending
Standard
Efficiency
Formula
Costs
Hours
Variance
Mainten.
Power
Total

18. Discuss Fixed Overhead Variance Analysis

19. How to calculate the total fixed overhead variance.
10-7
Standard fixed overhead rate (SFOR) $10 DLH
Actual fixed overhead costs $1,780
Standard hours allowed per unit 0.12
Actual production 1,400 units
REQUIRED: Calculate the total fixed overhead variance
Calculation:

20. How to calculate the fixed overhead variances: columnar and formula approaches.
10-8
Information from Cornerstone 10-6
Standard fixed overhead rate (SFOR) $10.00 DLH
Budgeted fixed overhead (BFOH) $1,900
Number of t-shirts produced 1,400 units
Hours allowed for production (SH) 168 hrs
REQUIRED: Calculate the fixed overhead spending and volume variances
Calculation: Columnar appears on next slide.
FOH Spending Variance
FOH Volume Variance

21. How to calculate the total fixed overhead variance.
10-8

22. Illustrate Analysis of the Volume Variance

23. How to prepare a static budget for an activity.
10-9
Demand for purchase orders is based on materials requirements: 18,000 purchase orders.
Resources needed:
6 purchasing agents, capable of processing 3,000 purchasing orders per year; salary $45,000.
Supplies, projected to cost $1.05 per purchase order
Desks and computers, depreciation $6,000
Office space, rent, and utilities $6,500
REQUIRED: Prepare a budget for the purchasing activity
Calculation: Purchasing budget:
Salaries Deprec. Supplies Occup. Total

24. How to prepare an activity flexible budget.
10-10
For simplicity the full set of information is not listed, but the individual activities, drivers, their cost, formulas, and the output levels are the inputs needed to prepare the budget. To illustrate, the maintenance activity would require the following information for its role in the budget:
Activity: Maintenance
Driver: Machine hours
Fixed activity costs: $20,000
Variable activity rate: $5.50 per machine hour
REQUIRED: Prepare an activity-based flexible budget
Calculation: Follows on the next slide, Driver = DLH

25. How to prepare an activity flexible budget.
10-10
Driver: DLH
Formula
Level of Activity
Fixed
Variable
12,000
22,000 DM DL
Subtotal
Driver: MH
Mainten.
Machining
Remainder follows on the next slide

26. How to prepare an activity flexible budget.
10-10
Driver: # of Setups
Fixed
Variable 25 30
Setups
Inspect.
Subtotal
Driver: # of Orders
Purchas.

27. How to prepare an activity-based performance report.
10-11
Actual activity level is the first one for each activity listed in Cornerstone
Actual cost:
Direct materials $103,000
Direct labor 83,000
Maintenance 57,000
Machining 27,000
Inspections 128,000
Setups 44,000
Purchases 230,000
REQUIRED: Prepare an activity-based performance report
Calculation: Appears on next slide.

28. How to prepare an activity-based performance report.
10-11
Act. Cost
Bud. Cost
Budget Var. DM
$103,000
$100,000 DL
83,000
80,000
Maint.
57,000
64,000
Machin.
27,000
31,000
Inspec.
128,000
132,500
Setups
44,000
45,000
Purch.
230,000
226,000
Total
$672,000
$678,500