Flexible Budgets and Overhead Analysis Management Accounting: The Cornerstone for Business Decisions Chapter 10 Flexible Budgets and Overhead Analysis Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives Prepare a flexible budget and use it for performance reporting. Calculate the variable overhead variances and explain their meaning. Calculate the fixed overhead variances and explain their meaning. 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). 10-1 For Quarter 2 Relationships 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

How to prepare a performance report based on a static budget (using budgeted production). 10-1 For Quarter 2 Relationships from the Master Budget Actual Data 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 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. 10-2 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. Required: Prepare a budget for three levels of output: 1,100, 1,300, 1,500 units Calculation: 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

How to prepare a performance report using a flexible budget. 10-3 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 Actual Budgeted Variance Units 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 Total $ 11,522.50 $ 12,035.00

How to calculate the total variable overhead variance. 10-4 Standard variable overhead rate (SVOR) $5.00 DLH Actual variable overhead costs 200 hrs. (AH) @ $4.70 (AVOR) Standard rate allowed per unit 0.12 hr Actual production 1,600 units REQUIRED: Calculate the total variable overhead variance Calculation:

How to calculate the variable overhead variances: columnar and formula approaches. 10-5 Standard variable overhead rate (SVOR) $5.00 DLH Actual variable overhead rate (AVOR) $4.70 Actual hours worked (AH) 200 hrs Number of t-shirts produced 1,600 units Hours allowed for production (SH) 192 hrs REQUIRED: Calculate the variable overhead spending and efficiency variances Calculation: 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. 10-6 Standard variable overhead rate (SVOR) $5.00 DLH Actual costs: Maintenance $715 Power $225 Actual hours worked (AH) 200 hrs Number of t-shirts produced 1,600 units Variable overhead: Maintenance 0.12 hr @ $3.75 Power 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.

How to prepare a performance report for the variable overhead variances. 10-6 Budget for Cost Actual Spending Standard Efficiency Formula Costs Hours Variance Mainten. Power Total

Discuss Fixed Overhead Variance Analysis

How to calculate the total fixed overhead variance. 10-7 Standard fixed overhead rate (SFOR) $10 DLH Actual fixed overhead costs $1,780 Standard hours allowed per unit 0.12 Actual production 1,400 units REQUIRED: Calculate the total fixed overhead variance Calculation:

How to calculate the fixed overhead variances: columnar and formula approaches. 10-8 Information from Cornerstone 10-6 Standard fixed overhead rate (SFOR) $10.00 DLH Budgeted fixed overhead (BFOH) $1,900 Number of t-shirts produced 1,400 units Hours allowed for production (SH) 168 hrs REQUIRED: Calculate the fixed overhead spending and volume variances Calculation: 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. 10-9 Demand for purchase orders is based on materials requirements: 18,000 purchase orders. Resources needed: 6 purchasing agents, capable of processing 3,000 purchasing orders per year; salary $45,000. Supplies, projected to cost $1.05 per purchase order Desks and computers, depreciation $6,000 Office space, rent, and utilities $6,500 REQUIRED: Prepare a budget for the purchasing activity Calculation: Purchasing budget: Salaries Deprec. Supplies Occup. Total

How to prepare an activity flexible budget. 10-10 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: Maintenance Driver: Machine hours Fixed activity costs: $20,000 Variable activity rate: $5.50 per machine hour REQUIRED: Prepare an activity-based flexible budget Calculation: Follows on the next slide, Driver = DLH

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 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. 10-11 Actual activity level is the first one for each activity listed in Cornerstone 10-10. Actual cost: Direct materials $103,000 Direct labor 83,000 Maintenance 57,000 Machining 27,000 Inspections 128,000 Setups 44,000 Purchases 230,000 REQUIRED: Prepare an activity-based performance report Calculation: Appears on next slide.

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