Chapter 11 Flexible Budgeting and the Management of Overhead and Support Activity Costs

Learning Objective 1

Static budgets are prepared for a single, planned level of activity. Flexible Budgets Hmm! Comparing static budgets with actual costs is like comparing apples and oranges. Static budgets are prepared for a single, planned level of activity. Performance evaluation for overhead is difficult when actual activity differs from the planned level of activity.

Flexible Budgets Central Concept If you can tell me what your activity was for the period, I will tell you what your costs and revenue should have been.

Advantages of Flexible Budgets Show revenues and expenses that should have occurred at the actual level of activity. May be prepared for any activity level in the relevant range. Reveal variances due to good cost control or lack of cost control. Improve performance evaluation.

Learning Objective 2

Preparing a Flexible Budget Note: There is no flex in the fixed costs.

Preparing a Flexible Budget Total budgeted overhead cost = Budgeted variable Total overhead cost per activity activity unit units × + Budgeted fixed overhead cost

Flexible Budget Performance Report .

Learning Objective 3

Overhead Application in a Standard Costing System

Overhead Application in a Standard Costing System

Learning Objective 4

Choice of Activity Measure Variable overhead and the activity measure should vary in a similar pattern. Identify variable overhead cost drivers. Examples: machine hours, labor hours, process time. Dollar measures should be avoided as they are subject to price-level changes.

Learning Objective 5

Variable Overhead Variances Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours AH × AR AH × SVR SH × SVR Spending Variance Efficiency Variance Spending variance = AH(AR - SVR) Efficiency variance = SVR(AH - SH)

Variable Overhead Variances – A Closer Look Spending Variance Efficiency Variance Results from paying more or less than expected for overhead items and from excessive usage of overhead items. A function of the selected cost driver. It does not reflect overhead control.

Fixed Overhead Variances Actual Fixed Fixed Fixed Overhead Overhead Overhead Incurred Budget Applied SH × PFOHR Budget Variance Volume Variance PFOHR = Predetermined Fixed Overhead Rate SH = Standard Hours Allowed

Budgeted Fixed Overhead Planned Activity in Hours Recall that fixed overhead costs are applied to products and services using a predetermined fixed overhead rate (PFOHR): Applied Fixed Overhead = PFOHR × Standard Hours Budgeted Fixed Overhead Planned Activity in Hours PFOHR =

Fixed Overhead Variances – A Closer Look Budget Variance Volume Variance Results from paying more or less than expected for overhead items. Results from the inability to operate at the activity level planned for the period. Has no significance for cost control.

Learning Objective 6

Overhead Cost Performance Report

Learning Objective 7 – 9 can be found in the Text Book

I’m here to your budget. Are you ready to ante up? End of Chapter 11 I’m here to your budget. Are you ready to ante up?