flexible budgets and overhead analysis management accounting: the cornerstone for business decisions...
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Flexible Budgets and Overhead
Analysis
Management Accounting: The Cornerstone for
Business Decisions
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
How to prepare a performance report based on a static budget (using
budgeted production).For Quarter 2Relationships from the Master Budget Actual Data
Budgeted production units 1,590 Production units 1,800
Materials: Materials cost: $ 6,570.00
1 plain t-shirt @ $3.00
5 ounces of ink @ $0.20
Labor: Labor cost: $ 2,250.00
0.12 hr. @ $10.00
10-1
How to prepare a performance report based on a static budget (using
budgeted production).For Quarter 2Relationships from the Master Budget Actual Data
10-1
Variable overhead
Maintenance Maintenance: $ 802.50
0.12 hr. @ 3.75
Power 0.12 @ $1.25 Power $ 255.00
Fixed overhead
Grounds keeping: $1,105 per qtr. Grounds keeping $ 1,055.00
Depreciation: $540 per qtr. Depreciation $ 540.00
REQUIRED: Prepare a performance report using a budget based on expected production.Calculation: Appears on next slide.
How to prepare a performance report based on
a static budget (using budgeted production).
10-1
Actual Budgeted Variance
Units 1,590 1,800
DM cost $ 6,360.00 $ 6,570.00
DL cost 1,908.00 2,250.00
Overhead:
Variable:
Maintenance 715.50 802.50
Power 238.50 255.00
Fixed:
Grounds Keeping 1,105.00 1,055.00
Depreciation 540.00 540.00
Total $ 10,867.00 $ 11,472.50
Define the two types of flexible budgets.
◙ Before-the-fact
◙ After-the-fact
How to prepare a flexible production
budget.Levels of activity 1,100
1,300 1,500
Materials:
1 plain t-shirt @ $3.00
5 ounces of ink @ $0.20
Labor:
0.12 hr. @ $10.00
Variable overhead
Maintenance
0.12 hr. @ 3.75
Power 0.12 @ $1.25
Fixed overhead
Grounds keeping: $1,105 per qtr.
Depreciation: $540 per qtr.
10-2
Required: Prepare a budget for three levels of output: 1,100, 1,300, 1,500 unitsCalculation: Appears on the following slide
How to prepare a flexible production
budget.10-2
Variable Cost Range of Production
per Unit units
Units
DM cost
DL cost
Overhead:
Variable:
Mainten.
Power
Tot var cost
Remainder on following slide
How to prepare a flexible production
budget.10-2
Fixed:
Grds Kp
Deprec
Total fix cost
Total prod cost
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 report
using a flexible budget.10-3
How to prepare a performance report
using a flexible budget.10-3
Actual Budgeted Variance
Units 1,800 1,800
DM cost $ 6,570.00 $ 7,200
DL cost 2,250.00 2,160.00
Overhead:
Variable:
Maintenance 802.50 810.00
Power 255.00 270.00
Fixed:
Grounds Keeping 1,105.00 1,055.00
Depreciation 540.00 540.00
Total $ 11,522.50 $ 12,035.00
How to calculate the total variable overhead
variance.Standard variable overhead rate (SVOR) $5.00
DLHActual variable overhead costs 200 hrs. (AH) @
$4.70 (AVOR)Standard rate allowed per unit 0.12 hrActual production 1,600 unitsREQUIRED: Calculate the total variable overhead
varianceCalculation:
10-4
How to calculate the variable overhead variances:
columnar and formula approaches.
10-5Standard variable overhead rate (SVOR)
$5.00 DLHActual variable overhead rate (AVOR) $4.70 Actual hours worked (AH) 200 hrsNumber of t-shirts produced 1,600 unitsHours allowed for production (SH) 192 hrsREQUIRED: Calculate the variable overhead
spending and efficiency variancesCalculation: Columnar appears on next slide.VOH Spending Variance
VOH Efficiency Variance
How to calculate the total variable overhead
variance.10-5
How to prepare a performance report for the
variable overhead variances.Standard variable overhead rate (SVOR) $5.00
DLHActual costs:
Maintenance $715Power $225
Actual hours worked (AH) 200 hrsNumber of t-shirts produced 1,600 unitsVariable overhead:
Maintenance 0.12 hr @ $3.75Power 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.10-6
Budget for Budget for
Cost Actual Actual Spending Standard Efficiency
Cost Formula Costs Hours Variance Hours Variance
Mainten.
Power
Total
Discuss Fixed Overhead Variance
Analysis
How to calculate the total fixed overhead
variance.Standard fixed overhead rate (SFOR) $10 DLHActual fixed overhead costs $1,780Standard hours allowed per unit 0.12Actual production 1,400 unitsREQUIRED: Calculate the total fixed overhead
varianceCalculation:
10-7
How to calculate the fixed overhead variances:
columnar and formula approaches.
10-8Information from Cornerstone 10-6Standard fixed overhead rate (SFOR) $10.00
DLHBudgeted fixed overhead (BFOH) $1,900 Number of t-shirts produced 1,400 unitsHours allowed for production (SH) 168
hrsREQUIRED: Calculate the fixed overhead
spending and volume variancesCalculation: Columnar appears on next slide.FOH Spending Variance
FOH Volume Variance
How to calculate the total fixed overhead
variance.10-8
Illustrate Analysis of the Volume Variance
How to prepare a static budget for an activity.
1. Demand for purchase orders is based on materials requirements: 18,000 purchase orders.
2. Resources needed:1. 6 purchasing agents, capable of processing
3,000 purchasing orders per year; salary $45,000.
2. Supplies, projected to cost $1.05 per purchase order
3. Desks and computers, depreciation $6,0004. Office space, rent, and utilities $6,500
REQUIRED: Prepare a budget for the purchasing activity
Calculation: Purchasing budget:
Salaries Deprec. Supplies Occup. Total
10-9
How to prepare an activity flexible budget.
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: MaintenanceDriver: Machine hoursFixed activity costs: $20,000Variable activity rate: $5.50 per machine hourREQUIRED: Prepare an activity-based flexible budgetCalculation: Follows on the next slide, Driver = DLH
10-10
How to prepare an activity flexible budget.10-10
Driver: DLH Formula Level of Activity
Fixed Variable 12,000 22,000
DM
DL
Subtotal
Driver: MH
Mainten.
Machining
Subtotal
Remainder follows on the next slide
How to prepare an activity flexible budget.10-10
Driver: # of Setups
Fixed Variable 25 30
Setups
Inspect.
Subtotal
Driver: # of Orders
Purchas.
How to prepare an activity-based
performance report.Actual activity level is the first one for each
activity listed in Cornerstone 10-10.Actual cost:Direct materials $103,000Direct labor 83,000Maintenance 57,000Machining 27,000Inspections 128,000Setups 44,000Purchases 230,000REQUIRED: Prepare an activity-based
performance reportCalculation: Appears on next slide.
10-11
How to prepare an activity-based
performance report.10-11
Act. Cost Bud. Cost Budget Var.
DM $103,000 $100,000
DL 83,000 80,000
Maint. 57,000 64,000
Machin. 27,000 31,000
Inspec. 128,000 132,500
Setups 44,000 45,000
Purch. 230,000 226,000
Total $672,000 $678,500