©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratto 8 - 1 Flexible Budgets Distinguish between flexible budgets and master (static) budgets. Learning Objective 1
Dec 19, 2015
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 1
Flexible Budgets
Distinguish between flexible
budgets and master
(static) budgets.
Learning Objective 1
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 2
Flexible Budget
A flexible budget (variable budget) is a budget that adjusts for changes in sales volume and other cost-driver activities.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 3
Flexible Budget Formulas
The flexible budget is based on the sameassumptions of revenue and cost behavior(within the relevant range) as is the master budget.
The flexible budget incorporates effects on eachcost and revenue caused by changes in activity.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 4
E.g. of Flexible Budgets
Units 7000 8000 9000
Sales 20 140,000 160,000 180,000 15 105,000 120,000 135,000 5 35,000 40,000 45,000
40,000 40,000 40,000 40,000
(5,000) - 5,000
Variable CostsContribution
Fixed CostsNet Profit / (Loss)
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 5
Objective 3
Understand the performance
evaluation relationship
between master (static)
budgets and flexible budgets.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 6
Performance Evaluation Using Flexible Budgets
Comparing theflexible budget toactual resultsaccomplishes animportantperformanceevaluation purpose.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 7
Performance Evaluation Using Flexible Budgets
There are basically two reasons why actual results might differ from the master budget.
1 Sales and other cost-driver activities were not the same as originally forecasted.
2 Revenue or variable costs per unit of activity and fixed costs per period were not as expected.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 8
Performance Evaluation Using Flexible Budgets
The intent of using the flexible budgetfor performance evaluation is to isolateunexpected effects on actual resultsthat can be corrected if adverse orenhanced if beneficial.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 9
Flexible-Budget Variances
Total flexible-budget variance= Total actual results– Total flexible budget for actual sales activity level
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 10
Sales-Activity Variances
Total sales-activity variance
=
Actual sales unit – Master budgeted sales units
×
Budgeted contribution margin per unit
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 11
Currently Attainable Standards...
– are standards based on levels of performance that can be achieved by realistic levels of effort.
Allowances are made for normal defects, spoilage, waste, and nonproductive time.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 12
When to Investigate Variances
When should variances be investigated?Knowing exactly when to investigate is difficult.
Many organizations have developed such rules of thumb as “investigate all variances exceeding $5,000 or 25% of expected cost, whichever is lower”.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 13
Flexible-Budget Variance Example
Flexible budget(or total standardcost allowed)
Units ofgood output achieved
Input allowed per unit of output
Standardunit priceon input
××
=
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 14
Flexible-Budget Variance Example
Flexible budget (ortotal standard costallowed): $70,000
Units of good output achieved:7,000
Input allowed per unit of output:5 pounds
Standard unitprice on input:$2 per pound
××
=
Standard Direct-Materials Cost Allowed
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 15
Flexible-Budget Variance Example
Direct material flexible budget variance = $80 F
ActualCost
$69,920
FlexibleBudget$70,000
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 16
Flexible-Budget Variance Example
Flexible budget (ortotal standard costallowed): $56,000
Units of good output achieved:7,000
Input allowed per unit of output:½ hour
Standard unitprice on input:$16 per hour
××
=
Standard Direct-Labor Cost Allowed
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 17
Price Variance Computations
Direct-material price variance
Actual price – Standard price × Actual
quantity
($1.90 – $2.00) per pound× 36,800 pounds = $3,680 favorable
=
=
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 18
Price Variance Computations
Direct-labor price variance
Actual price – Standard price × Actual
quantity
($16.40 – $16.00) per hour× 3,750 hours = $1,500 unfavorable
=
=
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 19
Price Variance Computations
Direct-material usage variance
Actual quantity – Standard quantity
× Standardprice
[36,800 – (7,000 × 5)] pounds× $2.00 per pound = $3,600 unfavorable
=
=
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 20
Price Variance Computations
Direct-labor usage variance
Actual quantity – Standard quantity
× Standardprice
[3,750 – (7,000 × ½)] hours× $16 per hour = $4,000 unfavorable
=
=
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 21
Favorable or Unfavorable Variance?
To determine whether a variance is favorable or unfavorable, use logic rather than memorizing a formula.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 22
Effects of Inventories
What if production does not equal sales? The sales-activity variance then is the
difference between the static budget and the flexible budget for the number of units sold.
In contrast, the flexible-budget cost variances compare actual costs with flexible-budgeted costs for the number of units produced.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 23
Objective 7
Compute variable overhead
spending and efficiency
variances.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 24
Variable Overhead Variances
Spending variance Efficiency variance
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 25
Variable-Overhead Efficiency Variance
When actual cost-driver activity differs fromthe standard amount allowed for the actualoutput achieved, a variable-overheadefficiency variance will occur.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 26
Variable-Overhead Spending Variance...
– is the difference between the actual variable overhead and the amount of variable overhead budgeted for the actual level of cost-driver activity.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 27
Flexible-Budget Variance Example
Standard variable overhead rate per unit of output:
$0.60 per unit or $1.20 per direct labor hour
½ hour is allowed per unit of output
Suppose that Dominion Company’s cost ofsupplies, a variable-overhead cost, isdriven by direct-labor hours.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 28
Flexible-Budget Variance Example
Actual variable overhead = $4,700
Variable overhead allowed= $.60 × 7,000 units = $4,200
$500 unfavorable variance
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 29
Price Variance Computations
Variable-overhead efficiency variance
Actual direct labor hours – Standard hours
×Standardrate perhour
(3,750 actual hours – 3,500 standardhours allowed) × $1.20 per hour= $300 unfavorable
=
=
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 8 - 30
Price Variance Computations
Variable-overhead spending variance
Actualvariableoverhead
–Expected rate per hour× Actual direct-laborhours used
($4,700 – ($1.20 × 3,750 hours)= $200 unfavorable
=
=