Flexible Budget & Overhead Analysis_report

8/13/2019 Flexible Budget & Overhead Analysis_report

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Copyright 2006, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin

Flexible Budgets andOverhead Analysis

by: April Alfonso


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Copyright 2006. The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin

Static Budgets and Performance Reports

Static budgetsare prepared for

a single, plannedlevel of activity.

Performanceevaluation is difficultwhen actual activity

differs from theplanned level of

activity.

Hmm! Comparingstatic budgets withactual costs is likecomparing apples

and oranges.


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Flexible Budgets

Improve performance evaluation.

May be prepared for any activitylevel in the relevant range.

Show costs that should have been

incurred at the actual level ofactivity, enabling

apples to apples

cost comparisons.

Reveal variances related tocost control.

Let

s look at CheeseCo.


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CheeseCo



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CheeseCo



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U = Unfavorable variance CheeseCo was unable to achieve

the budgeted level of activity.

CheeseCo



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CheeseCo

F = Favorable variance that occurs whenactual costs are less than budgeted costs.




Since cost variances are favorable, havewe done a good job controlling costs?

CheeseCo



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The relevant question is . . .How much of the favorable cost variance is

due to lower activity, and how much is due togood cost control?

To answer the question,we mustthe budget to theactual level of activity.




Preparing a Flexible Budget

To a budget we need to know that:Total variable costs changein direct proportion tochanges in activity.

Total fixed costs remainunchanged within therelevant range. Fixed



Cost TotalFormula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours

Machine hours 8,000 10,000 12,000

Variable costs Indirect labor 4.00$

Indirect material 3.00 Power 0.50

Total variable cost 7.50$

Fixed costs Depreciation 12,000$

Insurance 2,000 Total fixed costTotal overhead costs

Flexible Budgets


Fixed costs areexpressed as atotal amount.

Variable costs are expressed asa constant amount per hour.

$40,000 10,000 hours is$4.00 per hour.

CheeseCo




Machine hours 8,000 10,000 12,000

Variable costs Indirect labor 4.00$ 32,000$

Indirect material 3.00 24,000 Power 0.50 4,000

Total variable cost 7.50$ 60,000$

Fixed costs Depreciation 12,000$

Insurance 2,000 Total fixed costTotal overhead costs

Flexible Budgets


$4.00 per hour 8,000 hours = $32,000

CheeseCo




CheeseCoCost Total

Formula Fixed 8,000 10,000 12,000per Hour Cost Hours Hours Hours

Machine hours 8,000 10,000 12,000




Fixed costs Depreciation 12,000$ 12,000$

Insurance 2,000 2,000 Total fixed cost 14,000$Total overhead costs 74,000$

Flexible Budgets




Machine hours 8,000 10,000 12,000

Variable costs Indirect labor 4.00$ 32,000$ 40,000$

Indirect material 3.00 24,000 30,000 Power 0.50 4,000 5,000

Total variable cost 7.50$ 60,000$ 75,000$

Fixed costs Depreciation 12,000$ 12,000$ 12,000$

Insurance 2,000 2,000 2,000 Total fixed cost 14,000$ 14,000$Total overhead costs 74,000$ 89,000$ ?

Flexible Budgets


Total fixed costsdo not change in

the relevant range.

CheeseCo





Machine hours 8,000 10,000 12,000

Variable costs Indirect labor 4.00$ 32,000$ 40,000$ 48,000$

Indirect material 3.00 24,000 30,000 36,000 Power 0.50 4,000 5,000 6,000

Total variable cost 7.50$ 60,000$ 75,000$ 90,000$

Fixed costs Depreciation 12,000$ 12,000$ 12,000$ 12,000$

Insurance 2,000 2,000 2,000 2,000 Total fixed cost 14,000$ 14,000$ 14,000$Total overhead costs 74,000$ 89,000$ 104,000$

Flexible Budgets



Flexible Budget Performance Report



Cost TotalFormula Fixed Flexible Actualper Hour Cost Budget Results Variances

Machine hours 8,000 8,000 0






CheeseCo Flexible budget isprepared for the

same activity level(8,000 hours) as

actually achieved.






Variable costs Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material 3.00 25,500

Power 0.50 3,800 Total variable cost 7.50$ 63,300$



CheeseCo






Variable costs Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U Indirect material 3.00 24,000 25,500 1,500 U Power 0.50 4,000 3,800 200 FTotal variable cost 7.50$ 60,000$ 63,300$ $ 3,300 U

Fixed costs Depreciation 12,000$ 12,000$ 12,000$ $ 0 Insurance 2,000 2,000 2,050 50 UTotal fixed cost 14,000$ 14,050$ 50 UTotal overhead costs 74,000$ 77,350$ $ 3,350 U

CheeseCo




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?


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Difference between original static budgetand actual overhead = $11,650 F.

Overhead Variance Analysis

Static ActualOverhead Overhead

Budget at at10,000 Hour 8,000 Hour

89,000$ 77,350$

Let

s placethe flexiblebudget for

8,000 hourshere.



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Overhead Variance Analysis

This $15,000 F variance isdue to lower activity.

Activity

This $3,350 Uvariance is due

to poor cost control.

Cost control

Static Flexible ActualOverhead Overhead Overhead

Budget at Budget at at10,000 Hour 8,000 Hour 8,000 Hour

89,000$ 74,000$ 77,350$



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The Measure of Activity A Critical Choice

Three importantfactors in selecting an

activity base for an overhead

flexible budget Activity base andvariable overhead

should becausally related.

Activity base shouldnot be expressed

in dollars orother currency.

Activity base shouldbe simple and

easily understood.

V i bl O h d V i


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Variable Overhead Variances A Closer Look

If flexible budgetis based onactual hours

If flexible budgetis based on

standard hours

Only a spendingvariance can be

computed.

Both spending

and efficiency variances can becomputed.


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ColaCo

s actual production for the period required3,200 standard machine hours. Actual variable

overhead incurred for the period was $6,740.

Actual machine hours worked were 3,300. Thestandard variable overhead cost per machine houris $2.00.

Compute the variable overhead spending variancefirst using actual hours. Then use standard hoursallowed to calculate the variable overhead

efficiency variance.

Variable Overhead Variances Example


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Actual Flexible BudgetVariable for Variable

Overhead Overhead atIncurred Actual Hours

AH SRAH AR

Spending

Variance

Spending variance = AH(AR SR)

Variable Overhead Variances

AH = Actual hoursAR = Actual variable

overhead rate

SR = Standard variableoverhead rate


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Actual Flexible BudgetVariable for Variable

Overhead Overhead atIncurred Actual Hours

3,300 hours$2.00 per hour

= $6,600$6,740

Spending Variance= $140 unfavorable




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Spending Variance

Results from paying moreor less than expected for

overhead items and fromexcessive usage ofoverhead items.

Now, let

s use thestandard hours allowed,along with the actual

hours, to compute theefficiency variance.


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AHSRAH AR

Spending variance = AH(AR - SR)Efficiency variance = SR(AH - SH)

SHSR

Spending

Variance

Efficiency

Variance

Actual Flexible Budget Flexible BudgetVariable for Variable for Variable

Overhead Overhead at Overhead atIncurred Actual Hours Standard Hours



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3,300 hours 3,200 hours

$2.00 per hour $2.00 per hour


$6,740 $6,600 $6,400

Spending variance$140 unfavorable

Efficiency variance$200 unfavorable

$340 unfavorable flexible budget total variance





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Efficiency Variance

Controlled bymanaging the

overhead cost driver.



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Quick Check

Yoder Enterprises

actual production for theperiod required 2,100 standard direct laborhours. Actual variable overhead for the periodwas $10,950. Actual direct labor hours worked

were 2,050. The predetermined variableoverhead rate is $5 per direct labor hour. Whatwas the spending variance?a. $450 U

b. $450 Fc. $700 Fd. $700 U


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Yoder Enterprises


were 2,050. The predetermined variableoverhead rate is $5 per direct labor hour. Whatwas the spending variance?a. $450 U

b. $450 Fc. $700 F d. $700 U

Quick Check

Spending variance = AH (AR - SR)= Actual variable overhead incurred (AH SR)

= $10,950 (2,050 hours $5 per hour)

= $10,950 $10,250= $700 U


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Quick Check

Yoder Enterprises


were 2,050. The predetermined variableoverhead rate is $5 per direct labor hour. Whatwas the efficiency variance?a. $450 U

b. $450 Fc. $250 Fd. $250 U


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Yoder Enterprises


were 2,050. The predetermined variableoverhead rate is $5 per direct labor hour. Whatwas the efficiency variance?a. $450 U

b. $450 Fc. $250 Fd. $250 U

Quick Check

Efficiency variance = SR (AH SH)

= $5 per hour (2,050 hours 2,100 hours)= $250 F


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2,050 hours 2,100 hours

$5 per hour $5 per hour

Quick Check Summary



$10,950 $10,250 $10,500

Spending variance$700 unfavorable

Efficiency variance$250 favorable

$450 unfavorable flexible budget total variance

Activity based Costing


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Activity-based Costingand the Flexible Budget

It is unlikely that allvariable overhead will bedriven by a single activity.

Activity-based costingcan be used when multiple

activity bases drivevariable overhead costs.


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Overhead Rates and Overhead Analysis

Overhead from theflexible budget for thedenominator level of activity

POHR =

Recall that overhead costs are assigned toproducts and services using a predetermined

overhead rate (POHR):

Assigned Overhead = POHR Standard Activity

Denominator level of activity

h d d h d l


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The predetermined overhead ratecan be broken down into fixed

and variable components.

The variablecomponent is useful

for preparing and analyzingvariable overheadvariances.

The fixedcomponent is useful

for preparing and analyzingfixed overheadvariances.

Overhead Rates and Overhead Analysis

l d d


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Normal versus Standard Cost Systems

In a normal cost system, overhead is

applied to work in

process based onthe actual numberof hours worked

in the period.

In a standard cost system, overhead is

applied to work in

process based onthe standard hoursallowed for the output

of the period.

Fi d O h d V i


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BudgetVariance

VolumeVariance

FR = Standard Fixed Overhead RateSH = Standard Hours AllowedDH = Denominator Hours

SH FR

Actual Fixed Fixed FixedOverhead Overhead OverheadIncurred Budget Applied

Fixed Overhead Variances

DH FR

Overhead Rates and Overhead


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ColaCo prepared this budget for overhead:

Overhead Rates and OverheadAnalysis Example

Total Variable Total Fixed Machine Variable Overhead Fixed Overhead

Hours Overhead Rate Overhead Rate

3,000 6,000 $ ? 9,000 $ ?

4,000 8,000 ? 9,000 ?

ColaCo applies overhead basedon machine-hour activity.

Let

s calculate overhead rates.



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Rate = Total Variable Overhead Machine Hours

This rate is constant at all levels of activity.



3,000 6,000 $ 2.00 $ 9,000 $ ?

4,000 8,000 2.00 9,000 ?





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3,000 6,000 $ 2.00 $ 9,000 $ 3.00 $

4,000 8,000 2.00 9,000 2.25

Rate = Total Fixed Overhead Machine Hours

This rate decreases when activity increases.





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3,000 6,000 $ 2.00 $ 9,000 $ 3.00 $

4,000 8,000 2.00 9,000 2.25

The total POHR is the sum ofthe fixed and variable rates

for a given activity level.



Fi d O h d V i E l


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ColaCo

s actual production required 3,200standard machine hours. Actual fixed

overhead was $8,450. The predeterminedoverhead rate is based on 3,000 machine hours.

Fixed Overhead Variances Example

O h d V i


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Overhead Variances

Now let

s turnour attentionto calculating

fixed overheadvariances .

Fi d O h d V i E l


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Budget variance$550 favorable

$8,450 $9,000



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Fi d O h d V i E l


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3,200 hours

$3.00 per hour

Budget variance$550 favorable


$8,450 $9,000 $9,600

Volume variance$600 favorable

SH FR


Volume Variance A Closer Look


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VolumeVariance

Results when standard hoursallowed for actual output differsfrom the denominator activity.

Unfavorablewhen standard hours< denominator hours

Favorablewhen standard hours> denominator hours



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VolumeVariance

Results when standard hoursallowed for actual output differsfrom the denominator activity.

Unfavorablewhen standard hours< denominator hours

Favorablewhen standard hours> denominator hours

Does not measure over-or under spending

It results from treating fixedoverhead as if it were a

variable cost.

Quick Check


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Quick Check

Yoder Enterprises

actual production for theperiod required 2,100 standard direct laborhours. Actual fixed overhead for the periodwas $14,800. The budgeted fixed overheadwas $14,450. The predetermined fixedoverhead rate was $7 per direct labor hour.What was the budget variance?a. $350 Ub. $350 Fc. $100 Fd. $100 U

Quick Check


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Yoder Enterprises

actual production for theperiod required 2,100 standard direct laborhours. Actual fixed overhead for the periodwas $14,800. The budgeted fixed overheadwas $14,450. The predetermined fixedoverhead rate was $7 per direct labor hour.What was the budget variance?a. $350 Ub. $350 Fc. $100 Fd. $100 U

Quick Check

Budget variance

= Actual fixed overhead Budgeted fixed overhead

= $14,800 $14,450

= $350 U

Quick Check


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Quick Check

Yoder Enterprises

actual production for theperiod required 2,100 standard direct laborhours. Actual fixed overhead for the periodwas $14,800. The budgeted fixed overheadwas $14,450. The predetermined fixedoverhead rate was $7 per direct labor hour.What was the volume variance?a. $250 Ub. $250 Fc. $100 Fd. $100 U

Quick Check


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Yoder Enterprises

actual production for theperiod required 2,100 standard direct laborhours. Actual fixed overhead for the periodwas $14,800. The budgeted fixed overhead

was $14,450. The predetermined fixedoverhead rate was $7 per direct labor hour.What was the volume variance?a. $250 Ub. $250 Fc. $100 Fd. $100 U

Quick Check

Volume variance= Budgeted fixed overhead (SH FR)= $14,450 (2,100 hours $7 per hour)= $14,450 $14,700

= $250 F

Quick Check Summary


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2,100 hours

$7.00 per hour

Budget variance$350 unfavorable

$14,800 $14,450 $14,700


Volume variance$250 favorable

SH FR

Quick Check Summary

Overhead Variances


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Overhead Variances

Let s look at agraph showingfixed overhead

variances. We willuse ColaCo

snumbers from theprevious example.



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Activity

Cost

3,000 HoursExpected

Activity

$9,000 budgeted fixed OH



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$8,450 actual fixed OH

Activity

Cost

3,000 HoursExpected

Activity


$8,450 actual fixed OH$550FavorableBudget

Variance{



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{


$8,450 actual fixed OH

3,200 machine hours $3.00 fixed overhead rate

$600Favorable

VolumeVariance

$9,600 applied fixed OH

3,200Standard

Hours

Activity

Cost

3,000 HoursExpected

Activity


$550FavorableBudget

Variance{ $8,450 actual fixed OH

Overhead Variances and Under- or


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Overapplied Overhead Cost

In a standardcost system:

Unfavorable variances are equivalent

to underapplied overhead.

Favorablevariances are equivalentto overapplied overhead.

The sum of the overhead variancesequals the under- or overapplied

overhead cost for a period.

Thank You!!!


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Thank You!!!

Flexible Budget & Overhead Analysis_report

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