1. Cornerstones of Managerial Accounting 2e Chapter Ten
Flexible Budgets and Overhead Analysis
Mowen/Hansen
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

2. Prepare a flexible budget, and use it for performance reporting.
Objective # 1
Prepare a flexible budget, and use it for performance reporting.

3. Performance Reports Compare actual costs with budgeted costs Two ways:
Compare actual costs with budgeted costs for the budgeted level of activity
Based on a static budget
Compare actual costs with the actual level of activity
Based on a flexible budget

4. Static Budget A budget for one particular level of activity
Performance report will compare:
Direct materials, direct labor, and overhead costs budgeted for the planned level of activity with
Actual costs for the actual level of activity
Resulting in unfavorable variances when actual production exceeds the planned level
To create a meaningful performance report:
Actual costs and expected costs must be compared at the same level of activity

5. Flexible Budget
Enables a firm to compute expected costs for a range of activity levels
Two types:
Before-the-fact -- Allows managers to see the expected outcomes for a range of activity levels
Used to generate financial results for a number of plausible scenarios
After-the-fact -- Created for the actual level of activity
Used to compute what costs should have been for the actual level of activity
Expected costs are then compared with the actual costs in order to assess performance

6. Calculate the variable overhead variances and explain their meaning
Objective # 2
Calculate the variable overhead variances and explain their meaning

7. Total Overhead Variance
Difference between applied and actual overhead
Broken down into:
Total Variable Overhead Variance
Broken further into:
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
Total Fixed Overhead Variance
Fixed Overhead Spending Variance
Fixed Overhead Volume Variance

8. Total Variable Overhead Variance
Actual Costs –
Applied Costs =
Total Variance
(AH X AVOR) –
(SH X SVOR)
Actual Hours x Actual Variable Overhead Rate
Hours allowed for production (SH) x Standard Variable Overhead Rate (SVOR)

9. Variable Overhead Spending Variance
Measures the aggregate effect of the differences between
Actual variable overhead rate (AVOR)
Standard variable overhead rate (SVOR)
Two ways to calculate:
Three-pronged columnar approach
Formula approach
(AVOR – SVOR)AH

10. Variable Overhead Efficiency Variance
Measures the change in variable overhead consumption that occurs because of efficient (or inefficient) use of direct labor
Two ways to calculate:
Three-pronged columnar approach
Formula approach
(AH – SH)SVOR

11. Example
Formula Approach:
VOH spending variance
(AVOR – SVOR)AH

12. VOH efficiency variance
Example
Formula Approach:
VOH efficiency variance
(AH – SH) SVOR

13. Calculate the fixed overhead variances, and explain their meaning
Objective # 3
Calculate the fixed overhead variances, and explain their meaning

14. Total Fixed Overhead Variance
Difference between actual and applied fixed overhead
When applied overhead = standard fixed overhead rate x standard hours allowed for the actual output
Broken down into:
Fixed Overhead Spending Variance
Fixed Overhead Volume Variance

15. Fixed Overhead Spending Variance
Difference between
Actual fixed overhead rate (AFOH)
Budgeted fixed overhead rate (BFOH)
Two ways to calculate:
Three-pronged columnar approach
Formula approach
AFOH – SFOH

16. Fixed Overhead Volume Variance
Difference between
Budgeted fixed overhead (BFOH)
Applied fixed overhead (ApFOH)
Two ways to calculate:
Three-pronged columnar approach
Formula approach
(SHp – SH)SFOR

17. Example
Information:
Standard fixed overhead rate (SFOR) $10.00 per direct labor hour
Budgeted fixed overhead (BFOH) $1,800
Number of tee shirts produced 1,200 units
Hours allowed for production (SH) 144 hours

18. Fixed Overhead (FOH) Volume Variance
Example
Formulas:
Fixed Overhead (FOH) Volume Variance
AFOH – BFOH

19. Fixed Overhead (FOH) Efficiency Variance
Example
Formulas:
Fixed Overhead (FOH) Efficiency Variance
(SHp - SH) SFOR

20. Prepare an activity-based flexible budget.
Objective # 4
Prepare an activity-based flexible budget.

21. Activity-Based Budgeting
A powerful planning and control tool
Can be used to emphasize cost reduction through the elimination of wasteful activities and improving efficiency of necessary activities
Two types:
Static activity budgets
Activity-based flexible budget