Chapter 11 – Flexible Budgets and Overhead
USING BUDGETS FOR PERFORMANCE EVALUATION
Budgets are useful for planning and control, often used as benchmarks for performance
Static Budgets vs. Flexible Budgets
A performance report compares actual costs with budgeted costs in the following ways:
1. Compare actual costs with the budgeted costs for the budgeted level of activity.
2. Compare actual costs with the actual level of activity.
The first choice requires a report based on static budgets, whereas the second choice needs a
report based on flexible budgets.
Static budget is a budget prepared in advance based on a particular level of activity and isn’t
adjusted or altered regardless of any changes in actual output, revenues, or costs.
Flexible budget enables a firm to compute the expected costs per unit and then estimate costs
for a range of activity levels or production volumes.
The key is knowledge of fixed and variable costs. 2 types of flexible budgets are:
Before-the-fact. Gives the expected outcomes for a range of activity levels or
After-the-fact. Based on the actual level of activity achieve in the period. Used
to compute what costs should’ve been for the actual level of activity or for the
actual production volume.
Budget costs change because total variable costs rise as output increases. Because of
this, flexible budgets are sometimes referred to as variable budgets.
Often flexible budget formulas are based on some level of input activity instead of
When standard hours are used, we need to convert units into DLH.
Flexible budgets allow management to compute what the costs should be for the level
of output that actually occurred.
A performance report, compares actual and budgeted costs for the actual level of
activity. It’s the 2 type of flexible budget.
The difference between the actual amount and the flexible budget amount is the
flexible budget variance.
It provides a measure of the efficiency of a manager.
A static budget provides a measure of whether or not a manager accomplishes his/her goals
and represents certain goals that the firm wants to achieve.
Flexible Budget Sales Variances
The sales component of a flexible budget will reveal the difference between the level of sales
actually achieved and the level of sales indicated by the master budget.
VARIABLE OVERHEAD ANALYSIS
OH is divided into fixed and variable categories, which are broken down to 2 variances: ACC 406
Variable OH Variance
Variable OH Spending Variance
Variable OH Efficiency Variance
Fixed OH Variance
Fixed OH Spending Variance
Fixed OH Volume Variance
Total Variance OH Variance
It’s the difference between the total actual variance OH and applied variable OH.
Variable OH spending variance measured the aggregate effect of difference between AVOR