Management
Accounting: The
Cornerstone for
Business Decisions
Flexible Budgets and
Overhead Analysis
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Learning Objectives
1. Prepare a flexible budget and use it for
performance reporting.
2. Calculate the variable overhead
variances and explain their meaning.
3. Calculate the fixed overhead variances
and explain their meaning.
4. Prepare an activity-based flexible
budget.
Illustrate Static and Flexible
Budget Variances
10-1
How to prepare a performance
report based on a static budget
(using budgeted production).
For Quarter 2
Relationships from the Master Budget Actual Data
Budgeted production units 1,590 Production units
Materials:
1,800
Materials cost:
$ 6,570.00
Labor cost:
$ 2,250.00
1 plain t-shirt @ $3.00
5 ounces of ink @ $0.20
Labor:
0.12 hr. @ $10.00
10-1
How to prepare a performance
report based on a static budget
(using budgeted production).
For Quarter 2
Relationships from the Master Budget
Actual Data
Variable overhead
Maintenance
Maintenance:
$
802.50
Power
$
255.00
Grounds keeping: $1,105 per qtr.
Grounds keeping
$ 1,055.00
Depreciation: $540 per qtr.
Depreciation
$
0.12 hr. @ 3.75
Power 0.12 @ $1.25
Fixed overhead
540.00
REQUIRED: Prepare a performance report using a budget based
on expected production.
Calculation: Appears on next slide.
10-1
How to prepare a performance
report based on a static budget
(using budgeted production).
Actual
Units
Budgeted
Variance
1,590
1,800
$ 210.00
F
DM cost
$ 6,360.00
$ 6,570.00
210.00
U
DL cost
1,908.00
2,250.00
342.00
U
Maintenance
715.50
802.50
87.00
U
Power
238.50
255.00
16.50
U
1,105.00
1,055.00
(50.00)
F
540.00
540.00
-
$ 10,867.00
$ 11,472.50
$ 605.50
Overhead:
Variable:
Fixed:
Grounds Keeping
Depreciation
Total
U
Define the two types of
flexible budgets.
◙ Before-the-fact
Managers deal with uncertainty by
seeing expected outcomes for a ranges of
activity levels
◙ After-the-fact
Managers build a flexible budget around
the actual level of activity achieved.
10-2
How to prepare a flexible
production budget.
Levels of activity 1,100 Variable overhead
1,300 1,500
Maintenance
Materials:
0.12 hr. @ 3.75
1 plain t-shirt @ $3.00
5 ounces of ink @ $0.20 Power 0.12 @ $1.25
Labor:
0.12 hr. @ $10.00
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
10-2
How to prepare a flexible
production budget.
Variable Cost
Range of Production
per Unit
units
Units
1,100
1,300
1,500
4.00
$4,400
$5,200
$ 6,000
1.20
1,320
1,560
1,800
Mainten.
0.45
495
585
675
Power
0.15
660
780
900
$6,875
$8,125
$ 9,375
DM cost
DL cost
$
Overhead:
Variable:
Tot var cost
Remainder on following slide
How to prepare a flexible
10-2
production budget.
Fixed:
Grds Kp
$1,105
$1,105
$ 1,105
Deprec
540
540
540
Total fix cost
$1,645
$1,645
$ 1,645
Total prod cost
$8,520
$9,770
$11,020
How to prepare a performance
10-3 report using a flexible budget.
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.
How to prepare a performance
10-3 report using a flexible budget.
Actual
Units
Budgeted
1,800
1,800
$
7,200
Variance
$
-
F
630.00
F
(90.00)
U
DM cost
$ 6,570.00
DL cost
2,250.00
2,160.00
Maintenance
802.50
810.00
7.50
F
Power
255.00
270.00
15.00
F
1,105.00
1,055.00
(50.00)
U
540.00
540.00
-
$ 11,522.50
$ 12,035.00
$ 512.50
Overhead:
Variable:
Fixed:
Grounds Keeping
Depreciation
Total
F
How to calculate the total
10-4 variable overhead variance.
Standard variable overhead rate (SVOR)
Actual variable overhead costs
$5.00 DLH
200 hrs. (AH) @
$4.70 (AVOR)
Standard rate allowed per unit
0.12 hr
Actual production
1,600 units
REQUIRED: Calculate the total variable overhead variance
Calculation:
Actual Costs
AH x AVOR
200 x $4.70 =
$940
-
Applied Costs
SH x SVOR
200 x $5.00 =
$1,000
=
Total Variance
(AH x AVOR) (SH x SVOR) =
$(60)
10-5
How to calculate the variable
overhead variances: columnar and
formula approaches.
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 = (AVOR – SVOR)AH
= ($4.70 - $5.00)200 = $60 F
VOH Efficiency Variance= (AH – SH)SVOR
= (200 – 192)$5.00 = $40 U
How to calculate the total
10-5 variable overhead variance.
1. AH x AVOR
(Actual Hours x
Actual Rate)
200 x $4.70 =
$940
2. AH x SVOR
(Actual Hours x
Variable
Overhead Rate
200 x $5.00 =
$1,000
Spending
Variance (1-2)
$45 F
3. SH x SVOR
(Standard Hours
x Variable
Overhead Rate) =
$(60)
Efficiency
Variance (2-3)
$30 U
Total Variance
(1-3)
$15 F
10-6
How to prepare a performance
report for the variable overhead
variances.
Standard variable overhead rate (SVOR) $5.00 DLH
Actual costs:
Maintenance
$715
Power
$225
Actual hours worked (AH)
200 hrs
Number of t-shirts produced
1,600 units
Variable overhead:
Maintenance
0.12 hr @ $3.75
Power
0.12 hr @ $1.25
REQUIRED: Prepare a performance report that
shows the variances on an item-by-item basis.
Calculation: Appears on the following slide.
10-6
How to prepare a performance
report for the variable overhead
variances.
Budget for
Budget for
Cost
Actual
Actual
Spending
Standard
Efficiency
Cost
Formula
Costs
Hours
Variance
Hours
Variance
Mainten.
$
3.75
$ 715
$
1.25
5.00
Power
Total
$
750
$(35.00)
F
225
250
(25)
$ 940
$ 1,000
$(60.00)
$
720
$ 30.00
U
F
240
10
U
F
$ 960.00
$ 40.00
U
Discuss Fixed Overhead
Variance Analysis
◙ Fixed overhead costs represent capacity
costs, manufacturing capacity costs
acquired in advance of usage and often
allocated over time
◙ The Standard Fixed Overhead Rate
(SFOR) = Budgeted Fixed Overhead
Costs / Practical Capacity
◙ Measurement is usually done in DLH or
MH instead of units
10-7
How to calculate the total
fixed overhead variance.
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:
Actual Costs
AFOH
$1,780
-
Applied Fixed
Overhead
SH x SFOR
168 x $10 =
$1,680
=
Total Variance
(AFOH –
ApFOH) =
$100
10-8
How to calculate the fixed overhead
variances: columnar and formula
approaches.
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 = (AFOH –BFOH)
= ($1,780 - $1,900) = $120 F
FOH Volume Variance = (BFOH – ApFOH)
= (SHp –SH)SHOR
= (190 – 168)$10.00 = $220 U
10-8
How to calculate the total
fixed overhead variance.
1. Actual Fixed
Overhead
$1,780
2. Budgeted
Fixed Overhead
(SHp x SHOR)
190 x $10.00 =
$1,900
Spending
Variance (1-2)
$120 F
3. SH x SFOR
(Standard Hours
x Fixed Overhead
Rate) 168 x
$10.00 =
$1,680
Volume
Variance (2-3)
$220 U
Total Variance
(1-3)
$100 F
Illustrate Analysis of the
Volume Variance
How to prepare a static
budget for an activity.
10-9
1.
2.
Demand for purchase orders is based on materials
requirements: 18,000 purchase orders.
Resources needed:
1.
2.
3.
4.
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
$270,000
Deprec.
$6,000
Supplies
$18,900
Occup.
$6,500
Total
$301,400
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
How to prepare an activity
10-10
flexible budget.
Driver: DLH
Formula
Fixed
DM
12,000
22,000
10
$ 120,000
$ 220,000
8
96,000
176,000
18
$ 228,000
$ 418,000
Fixed
Variable
10,000
18,000
$ 20,000
$
5.50
$ 75,000
$ 119,000
2.00
35,000
51,000
7.50
$ 120,000
$ 188,000
$
Variable
-
DL
Subtotal
Level of Activity
$
$
-
$
Driver: MH
Mainten.
Machining
Subtotal
Remainder follows on
the next slide
15,000
$ 35,000
$
How to prepare an activity
10-10
flexible budget.
Driver: # of Setups
Fixed
Setups
Inspect.
Subtotal
$
Variable
25
30
-
$ 1,800
$ 45,000
$ 54,000
80,000
2,100
132,500
143,000
$ 80,000
$ 3,900
$ 177,525
$ 197,030
16,000
27,000
$ 236,000
$ 247,000
Driver: # of Orders
Fixed
Purchas.
$ 220,000
Variable
$
1.00
How to prepare an activity10-11 based performance report.
Actual activity level is the first one for each activity listed
in Cornerstone 10-10.
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.
How to prepare an activity10-11 based performance report.
Act. Cost
Bud. Cost
Budget Var.
DM
$103,000
$100,000
$ 3,000
U
DL
83,000
80,000
3,000
U
Maint.
57,000
64,000
(7,000)
F
Machin.
27,000
31,000
(4,000)
F
Inspec.
128,000
132,500
(4,500)
F
Setups
44,000
45,000
(1,000)
F
Purch.
230,000
226,000
4,000
U
Total
$672,000
$678,500
$(6,500)
F