CHAPTER 11
Flexible Budgeting
EXERCISE 11-32 (15 MINUTES)
1.
Formula flexible budget:
2.
Total budgeted monthly electricity cost = (€25 euros*  number of patient days)
+ €40,000 euros
*€25 per patient day = 50 kwh per patient day  €.50 per kwh
Columnar flexible budget:
Variable electricity cost ............
Fixed electricity cost.................
Total electricity cost .................
10,000
€ 250,000
40,000
€ 290,000
Patient Days
20,000
€ 500,000
40,000
€ 540,000
30,000
€ 750,000
40,000
€ 790,000
PROBLEM 11-38 (20 MINUTES)
1.
Policy
Type
2.
3.
Standard
Clerical Hours
per Application
Actual
Activity
Standard
Clerical Hours
Allowed
Automobile .......................................
1
375
375
Renter's ............................................
1.5
300
450
Homeowner's ...................................
2
150
300
Health ................................................
2
600
1,200
Life ....................................................
5
300
1,500
Total ..................................................
3,825
The different types of applications require different amounts of clerical time, and variable
overhead cost is related to the use of clerical time. Therefore, basing the flexible budget on
the number of applications would give a misleading estimate of overhead costs. For
example, processing 100 life insurance applications will entail much more overhead cost
than processing 100 automobile insurance applications.
Formula flexible budget:
total 
 budgeted variable
Total budgeted


overhead
cost
per

clerical

 +
monthly overhead =
 clerical hour
cost
hours 

budgeted fixedoverhead cost
per month
Total budgeted monthly overhead cost = ($5.00  X) + $3,000
4.
where X denotes total clerical time in hours.
Budgeted overhead cost for May = ($5.00  3,825) + $3,000
= $22,125
PROBLEM 11-40 (30 MINUTES)
1.
A static budget is based on a single expected activity level. In contrast, a
flexible budget reflects data for several activity levels.
2.
Given the focus on a range of activity, a flexible budget would be more
useful because it incorporates several different activity levels.
3.
Static budget vs. actual experience:
Direct material used ($40.00) ........................
Direct labor ($10.00) ......................................
Variable production overhead ($12.50) ........
Depreciation ...................................................
Supervisory salaries .....................................
Other fixed production overhead .................
Total ..........................................................
Static
Budget:
24,000
Units
Actual:
20,000
Units
Variance
$ 960,000
240,000
300,000
48,000
72,000
480,000
$2,100,000
$ 865,000
221,200
304,000
48,000
75,600
478,000
$1,991,800
$ 95,000 F
18,800 F
4,000 U
---3,600 U
2,000 F
$108,200 F
Calculations:
Direct material used: $2,880,000 ÷ 72,000 units = $40.00 per
unit
Direct labor: $720,000 ÷ 72,000 units = $10.00 per unit
Variable production overhead: $900,000 ÷ 72,000 units =
$12.50 per unit
Depreciation: $144,000 ÷ 3 months = $48,000 per month
Supervisory salaries: $216,000 ÷ 3 months = $72,000 per
month
Other fixed production overhead: ($1,800,000 - $144,000 $216,000) ÷ 3 months = $480,000 per month
4.
Flexible budget vs. actual experience:
Flexible
Budget:
20,000
Units
Actual:
20,000
Units
Variance
Direct material used ($40.00)..........................
Direct labor ($10.00) ........................................
Variable production overhead ($12.50) .........
Depreciation ....................................................
Supervisory salaries .......................................
Other fixed production overhead ...................
Total............................................................
5.
$ 800,000
200,000
250,000
48,000
72,000
480,000
$1,850,000
$ 865,000
221,200
304,000
48,000
75,600
478,000
$1,991,800
A performance report based on flexible budgeting is preferred. The report
compares budgeted and actual performance at the same volume level,
eliminating any variations in activity. In essence, everything is placed on
a “level playing field.”
The general manager’s warning is appropriate because of the
sizable variances that have arisen. With the static budget, performance
appears favorable, especially with respect to variable costs. Bear in mind,
though, that volume was below the original monthly expectation of 24,000
units, presumably because of the plant closure. A reduced volume will
likely lead to lower variable costs than anticipated (and resulting favorable
variances).
When the volume differential is removed, variable cost variances
total $140,200U ($65,000U + $21,200U + $54,000U), or 11.2% of budgeted
variable costs ($800,000 + $200,000 + $250,000). The incurrence of
variable cost appears excessive with respect to all components of the
total: direct material, direct labor, and variable production overhead.
$ 65,000 U
21,200 U
54,000 U
---3,600 U
2,000 F
$141,800 U