Chapter 13
Flexible budgets
Dr. Pinar Guven-Uslu
Norwich Business School, UEA
Static Budgets and Performance Reports
.
Static budgets are
prepared for a single,
planned level of activity.
Performance evaluation is
difficult when actual
activity differs from the
planned level of activity.
Static Budgets and Performance Reports
CheeseCo Static Actual
Budget Results Variances
Machine hours 10,000 8,000
Variable costs
Ind irect labour £ 40,000 £ 34,000
Indirect materials 30,000 25,500
Power 5,000 3,800
Fixed costs
Depreciation 12,000 12,000
Insurance 2,000 2,050
Total overhead costs £ 89,000 £ 77,350
Static Budgets and Performance Reports
• The relevant question is . . .
“How much of the favourable cost
variance is due to lower activity, and how
much is due to good cost control?”
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.
Preparing a Flexible Budget
To a budget we need to know that:
– Total variable costs change
in direct proportion to
changes in activity.
– Total fixed costs remain ble
ar ia
unchanged within the V
relevant range. Fixed
Preparing a Flexible Budget
Let’s prepare
budgets
for CheeseCo.
Preparing a Flexible Budget
Cost Total Flexible Budgets
CheeseCo Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labour
Variable costs are expressed as
£ 32,000
Indirect material a constant
24,000 amount per hour.
Power 4,000
Total variable cost £ Calculate
£ these amounts
Fixed costs
Fixed costs are
Depreciation £
Insurance expressed as a
Total fixed cost total amount.
Total overhead costs
Flexible Budget
Performance Report
Compare actual figu
res
to flexible budget for
th e
same activity level
Flexible Budget
Performance Report
Cost Total
CheeseCo Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
VariableFlexible
costs budget is
prepared
Indirect labour for
£ the
4.00 £ 32,000 £ 34,000
same
Indirect activity level
material 3.00 24,000 25,500
Power 0.50 4,000 3,800
(8,000 hours)
Total variable costs
as
£ 7.50 £ 60,000 £ 63,300
actually achieved.
Fixed Expenses
Depreciation £ 12,000 £ 12,000 £ 12,000
InsuranceCalculate the 2,000 2,000 2,050
Total fixed costs £ 14,000 £ 14,050
variances
Total overhead costs £ 74,000 £ 77,350
Flexible Budget
Performance Report
Cost Total
FlexibleFormula
budget is
CheeseCo Fixed Flexible Actual
prepared for theCosts
Per Hour Budget Results Variances
Machine hours
same activity level 8,000 8,000 0
(8,000 hours) as
Variable costs
actually£achieved.
Indirect labour 4.00 £ 32,000 £ 34,000
Indirect material 3.00 24,000 25,500
Power 0.50 4,000 3,800
Total variable costs £ 7.50 £ 60,000 £ 63,300
Fixed Expenses
Depreciation £ 12,000 £ 12,000 £ 12,000
Insurance 2,000 2,000 2,050
Total fixed costs £ 14,000 £ 14,050
Total overhead costs £ 74,000 £ 77,350
Flexible Budget
Performance Report
Remember the ques
tion:
“How much of the to
tal
variance is due to ac
tivity
and how much is due
to
cost control?”
Static Budgets and Performance
How much of the £11,650 is due to activity
and how much is due to cost control?
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labour £ 40,000 £ 34,000 £6,000 F
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,050 50 U
Total overhead costs £ 89,000 £ 77,350 £11,650 F
Flexible Budget
Performance Report
Overhead Variance Analysis
Static Flexible Actual
Overhead budget Overhead
Budget at at
10,000 Hours 8,000 Hours
£ 89,000 £ 77,350
Calculate total overhead variance. How much is
due to change in activity and how much is due
to change in planned costs?
Flexible Budget
Performance Report
Overhead Variance Analysis
Static Let’s place Actual
Overhead the flexible Overhead
Budget at budget for at
10,000 Hours 8,000 hours 8,000 Hours
£ 89,000 here. £ 77,350
Difference between original static budget
and actual overhead = £11,650 F.
Flexible Budget Performance Report
There are two primary
reasons for unfavourable
variable overhead variances:
What causes
1. Spending too much for
the cost
resources.
control variance?
2. Using the resources
inefficiently.