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

2. Learning Objective 1

3. 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.

4. 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.

5. 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.

6. Learning Objective 2

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

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

9. Flexible Budget Performance Report.

10. Learning Objective 3

11. Overhead Application in a Standard Costing System

12. Overhead Application in a Standard Costing System

13. Learning Objective 4

14. 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.

15. Learning Objective 5

16. 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)

17. 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.

18. 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

19. 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 =

20. 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.

21. Learning Objective 6

22. Overhead Cost Performance Report

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

24. 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?