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Flexible budgets
Chapter 13
Dr. Pinar Guven-Uslu
Norwich Business School, UEA
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S tatic Budgets and Performance Reports
S tatic budgets areprepared for a single,
planned level of activity.
Performance evaluation isdifficult when actual
activity differs from theplanned level of activity.
.
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Static ActualBudget Results Variances
Machine hours 10,000 8,000Variable costs
Ind irect labour 40,000 34,000Indirect materials 30,000 25,500Power 5,000 3,800
Fixed costsDepreciation 12,000 12,000Insurance 2,000 2,050
Total overhead costs 89,000 77,350
S tatic Budgets and Performance Reports
CheeseCo
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S tatic Budgets and Performance Reports
The relevant question is . . .
How much of the favourable cost
variance is due to lower activity, and howmuch is due to good cost control?
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Flexible Budgets
Improve performance evaluation.
May be prepared for any activitylevel in the relevant range.
Show revenues and expensesthat should have occurred at theactual level of activity.
Reveal variances due to good costcontrol or lack of cost control.
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Preparing a Flexible Budget
Total variable costs change
in direct proportion tochanges in activity.
Total fixed costs remainunchanged within the
relevant range. F ixed
To a budget we need t o kno w that:
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Preparing a Flexible Budget
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Cost Total Flexible BudgetsFormula Fixed 8,000 10,000 12,000Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costsIndirect labour 32,000Indirect material 24,000Power 4,000
Total variable cost
Fixed costsDepreciation Insurance
Total fixed costTotal overhead costs
Preparing a Flexible Budget
Fixed costs areexpressed as atotal amount.
Variable costs are expressed asa constant amount per hour.
Calculate these amounts
CheeseCo
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Flexible Budget
Performance Report
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Cost TotalFormula Fixed Flexible ActualPer Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costsIndirect labour 4.00 32,000 34,000Indirect material 3.00 24,000 25,500Power 0.50 4,000 3,800
Total variable costs 7.50 60,000 63,300
Fixed ExpensesDepreciation 12,000 12,000 12,000Insurance 2,000 2,000 2,050
Total fixed costs 14,000 14,050Total overhead costs 74,000 77,350
Flexible BudgetPerformance Report
CheeseCo
Flexible budget isprepared for the
same activity level(8,000 hours) as
actually achieved.
Calculate thevariances
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Cost TotalFormula Fixed Flexible ActualPer Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costsIndirect labour 4.00 32,000 34,000Indirect material 3.00 24,000 25,500Power 0.50 4,000 3,800
Total variable costs 7.50 60,000 63,300
Fixed ExpensesDepreciation 12,000 12,000 12,000Insurance 2,000 2,000 2,050
Total fixed costs 14,000 14,050Total overhead costs 74,000 77,350
Flexible BudgetPerformance Report
CheeseCoFlexible budget isprepared for the
same activity level(8,000 hours) as
actually achieved.
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Flexible BudgetPerformance Report
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Static ActualBudget Results Variances
Machine hours 10,000 8,000 2,000 UVariable costs
Indirect labour 40,000 34,000 6,000 FIndirect materials 30,000 25,500 4,500 FPower 5,000 3,800 1,200 F
Fixed costsDepreciation 12,000 12,000 0Insurance 2,000 2,050 50 U
Total overhead costs 89,000 77,350 11,650 F
S tatic Budgets and PerformanceHow much of the 11,650 is due to activityand how much is due to cost control?
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Flexible Budget
Performance Report
Calculate total overhead variance. How much isdue to change in activity and how much is due
to change in planned costs?
Overhead Variance Analysis
tatic ActualOverhead Overhead
udget at atHours Hours
Flexible
budget
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Flexible Budget
Performance Report
Difference between original static budgetand actual overhead = 11,650 F.
Overhead Variance Analysis
tatic ActualOverhead Overhead
udget at at10,000 ours ,000 ours
,000 , 50
Lets place
the flexiblebudget for ,000 hours
here.
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Flexible Budget Performance Report
W hat causesthe cost
control variance?
There are two primaryreasons for unfavourablevariable overhead variances:
1. Spending too much for resources.
2. Using the resourcesinefficiently .