©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e,...

©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 1

Flexible Budgets

Distinguish between flexible

budgets and master

(static) budgets.

Learning Objective 1


Flexible Budget

A flexible budget (variable budget) is a budget that adjusts for changes in sales volume and other cost-driver activities.


Flexible Budget Formulas

The flexible budget is based on the sameassumptions of revenue and cost behavior(within the relevant range) as is the master budget.

The flexible budget incorporates effects on eachcost and revenue caused by changes in activity.


E.g. of Flexible Budgets

Units 7000 8000 9000

Sales 20 140,000 160,000 180,000 15 105,000 120,000 135,000 5 35,000 40,000 45,000

40,000 40,000 40,000 40,000

(5,000) - 5,000

Variable CostsContribution

Fixed CostsNet Profit / (Loss)


Objective 3

Understand the performance

evaluation relationship

between master (static)

budgets and flexible budgets.


Performance Evaluation Using Flexible Budgets

Comparing theflexible budget toactual resultsaccomplishes animportantperformanceevaluation purpose.



There are basically two reasons why actual results might differ from the master budget.

1 Sales and other cost-driver activities were not the same as originally forecasted.

2 Revenue or variable costs per unit of activity and fixed costs per period were not as expected.



The intent of using the flexible budgetfor performance evaluation is to isolateunexpected effects on actual resultsthat can be corrected if adverse orenhanced if beneficial.


Flexible-Budget Variances

Total flexible-budget variance= Total actual results– Total flexible budget for actual sales activity level


Sales-Activity Variances

Total sales-activity variance

=

Actual sales unit – Master budgeted sales units

×

Budgeted contribution margin per unit


Currently Attainable Standards...

– are standards based on levels of performance that can be achieved by realistic levels of effort.

Allowances are made for normal defects, spoilage, waste, and nonproductive time.


When to Investigate Variances

When should variances be investigated?Knowing exactly when to investigate is difficult.

Many organizations have developed such rules of thumb as “investigate all variances exceeding $5,000 or 25% of expected cost, whichever is lower”.


Flexible-Budget Variance Example

Flexible budget(or total standardcost allowed)

Units ofgood output achieved

Input allowed per unit of output

Standardunit priceon input

××

=



Flexible budget (ortotal standard costallowed): $70,000

Units of good output achieved:7,000

Input allowed per unit of output:5 pounds

Standard unitprice on input:$2 per pound

××

=

Standard Direct-Materials Cost Allowed



Direct material flexible budget variance = $80 F

ActualCost

$69,920

FlexibleBudget$70,000



Flexible budget (ortotal standard costallowed): $56,000

Units of good output achieved:7,000

Input allowed per unit of output:½ hour

Standard unitprice on input:$16 per hour

××

=

Standard Direct-Labor Cost Allowed


Price Variance Computations

Direct-material price variance

Actual price – Standard price × Actual

quantity

($1.90 – $2.00) per pound× 36,800 pounds = $3,680 favorable

=

=



Direct-labor price variance

Actual price – Standard price × Actual

quantity

($16.40 – $16.00) per hour× 3,750 hours = $1,500 unfavorable

=

=



Direct-material usage variance

Actual quantity – Standard quantity

× Standardprice

[36,800 – (7,000 × 5)] pounds× $2.00 per pound = $3,600 unfavorable

=

=



Direct-labor usage variance

Actual quantity – Standard quantity

× Standardprice

[3,750 – (7,000 × ½)] hours× $16 per hour = $4,000 unfavorable

=

=


Favorable or Unfavorable Variance?

To determine whether a variance is favorable or unfavorable, use logic rather than memorizing a formula.


Effects of Inventories

What if production does not equal sales? The sales-activity variance then is the

difference between the static budget and the flexible budget for the number of units sold.

In contrast, the flexible-budget cost variances compare actual costs with flexible-budgeted costs for the number of units produced.


Objective 7

Compute variable overhead

spending and efficiency

variances.


Variable Overhead Variances

Spending variance Efficiency variance


Variable-Overhead Efficiency Variance

When actual cost-driver activity differs fromthe standard amount allowed for the actualoutput achieved, a variable-overheadefficiency variance will occur.


Variable-Overhead Spending Variance...

– is the difference between the actual variable overhead and the amount of variable overhead budgeted for the actual level of cost-driver activity.



Standard variable overhead rate per unit of output:

$0.60 per unit or $1.20 per direct labor hour

½ hour is allowed per unit of output

Suppose that Dominion Company’s cost ofsupplies, a variable-overhead cost, isdriven by direct-labor hours.



Actual variable overhead = $4,700

Variable overhead allowed= $.60 × 7,000 units = $4,200

$500 unfavorable variance



Variable-overhead efficiency variance

Actual direct labor hours – Standard hours

×Standardrate perhour

(3,750 actual hours – 3,500 standardhours allowed) × $1.20 per hour= $300 unfavorable

=

=



Variable-overhead spending variance

Actualvariableoverhead

–Expected rate per hour× Actual direct-laborhours used

($4,700 – ($1.20 × 3,750 hours)= $200 unfavorable

=

=

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