Chapter 11

CHAPTER 11: FLEXIBLE BUDGETS AND OVERHEAD ANALYSIS
LO1: Differences of the static planning budget
1. Static budget:
A static budget is a budget prepared for a single level of activity that remains
unchanged even if the activity level subsequently changes.
2. Flexible budget:
A flexible budget provides estimates of what revenues and costs should be for any
level of activity, within a specified range. When used for performance evaluation purposes,
actual costs are compared to what the costs should have been for the actual level of activity
during the period. This enables “apples-to-apples” cost comparisons. A flexible budget can
be adjusted to reflect any level of activity. By contrast, a static budget is prepared for a
single level of activity and is not subsequently adjusted.
3. Favorable vs unfavorable:
Revenue variances are labeled favorable when actual revenues exceed budgeted
revenues, and they are labeled unfavorable when actual revenues are less than budgeted
revenues.
Expense variances are labeled favorable when actual expenses are less than
budgeted expenses, and they are labeled unfavorable when actual expenses exceed
budgeted expenses.
Flexing a budget involves two key assumptions about cost behavior:
- First, total variable costs change in direct proportion to changes in the activity
- Second, total fixed costs remain unchanged within a specified activity range.
The fixed overhead budget variance is the difference between the total budgeted
fixed overhead cost and the total amount of fixed overhead cost incurred. If actual costs
exceed budgeted costs, the variance is labeled unfavorable.
The volume variance is favorable when the activity level for a period, at standard, is
greater than the denominator activity level. Conversely, if the activity level, at standard, is
less than the denominator level of activity, the volume variance is unfavorable. The variance
does not measure deviations in spending. It measures deviations in actual activity from the
denominator level of activity
LO2: How a flexible budget works
1. Activity variance
An activity variance arises solely due to the difference in the level of activity included
in the planning budget and the actual level of activity.
Part of the discrepancy between the budgeted net operating income and the actual
net operating income is because the actual level of activity is higher than the planned
activity.
2. Revenue and spending variance

A revenue variance is a difference between what the total revenue should have been,
given the actual level of activity for the period, and the actual total revenue.
A spending variance is a difference between how much a cost should have been, given the
actual level of activity, and the actual amount of the cost.
3. Flexible budgets with multiple cost drivers
It is unlikely that all variable costs within a company are driven by a single factor
such as the number of units produced, labor hours, or machine hours. More than one cost
driver may be needed to adequately explain all of the costs in an organization. The cost
formulas used to prepare a flexible budget can be adjusted to recognize multiple cost
drivers.
EXERCISE
E11-8(GNBCY):
Lavage Rapide
Static Budget
For the Month Ended August 31
Budgeted number of cars 9000
Budgeted variable overhead costs:
Cleaning supplies ($0.80 SFr per car) 7200
Electricity ($0.15 SFr per car) 1350
Maintenance ($0.20 SFr per car) 1800
Administrative expense 900
Wages 2700
Total variable overhead cost 13,950
Budgeted fixed overhead cost
Operator wages 5000
Electricity 1200
Depreciation 6000
Rent 8000
Administrative expenses 4000
Total fixed cost 24,200
Total budgeted cost 38,150
E11-9(GNBCY):
Budgeted number of cars 9000
Actual number of cars 8800
Overhead cost Cost Actual costs Budget based Variance

formula incurred for on 9000 cars
(per car) 8,800 cars
Cleaning supplies 0.8 7040 7200 160 F
Electricity 0.15 1320 1350 30 F
Maintenance 0.2 1760 1800 40 F

Administrative 0.1 880 900 20 F
expense
Wages 0.3 2640 2700 60 F
Total variable cost 1.55 13640 13950 310 F
Fixed overhead costs
Operator wages 5000 5000 0
Depreciation 6000 6000 0
Rent 8000 8000 0
Electricity 1200 1200 0
Administrative 4000 4000 0

expenses
Total cost 34,240 38,150 3,910
Students may question the variances for fixed costs. Operator wages can differ from what
was budgeted for a variety of reasons including an unanticipated increase in the wage rate;
changes in the mix of workers between
Those earning lower and higher wages; changes in the number of operators on duty; and
overtime. Depreciation may have increased because of the acquisition of new equipment or
because of a loss on equipment that must be scrapped—perhaps due to poor maintenance.
(This assumes that the loss flows through the depreciation account on the performance
report.)
E11-15(GNBCY):
REVENUE & SPENDING VARIANCES
Budgeted number of gelato 6000
Actual number of gelato 6200
Actual Budgeted Variance
Revenue 71540 72000 460 F
Raw materials 29230 27900 1330 U
Wages 13860 14000 140 F
Utilities 3270 2830 440 U
Rent 2600 2600

Insurance 1350 1350
Miscellaneous 2590 2750 160 F
Total expenses 52900 51430 1470 U
NOI 18640 20570 1930 U

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CHAPTER 11: FLEXIBLE BUDGETS AND OVERHEAD ANALYSIS

LO1: Differences of the static planning budget

Flexing a budget involves two key assumptions about cost behavior:

LO2: How a flexible budget works

2. Revenue and spending variance

3. Flexible budgets with multiple cost drivers

For the Month Ended August 31

Budgeted number of cars 9000

Budgeted variable overhead costs:

Cleaning supplies ($0.80 SFr per car) 7200

Electricity ($0.15 SFr per car) 1350

Maintenance ($0.20 SFr per car) 1800

Administrative expense 900

Total variable overhead cost 13,950

Budgeted fixed overhead cost

Operator wages 5000

Administrative expenses 4000

Total fixed cost 24,200

Total budgeted cost 38,150

Budgeted number of cars 9000

Actual number of cars 8800

Overhead cost Cost Actual costs Budget based Variance

Cleaning supplies 0.8 7040 7200 160 F

Electricity 0.15 1320 1350 30 F

Maintenance 0.2 1760 1800 40 F

Wages 0.3 2640 2700 60 F

Total variable cost 1.55 13640 13950 310 F

Fixed overhead costs

Operator wages 5000 5000 0

Depreciation 6000 6000 0

Rent 8000 8000 0

Electricity 1200 1200 0

Administrative 4000 4000 0

Total cost 34,240 38,150 3,910

REVENUE & SPENDING VARIANCES

Budgeted number of gelato 6000

Actual number of gelato 6200

Actual Budgeted Variance

Revenue 71540 72000 460 F

Raw materials 29230 27900 1330 U

Wages 13860 14000 140 F

Utilities 3270 2830 440 U

Rent 2600 2600

Miscellaneous 2590 2750 160 F

Total expenses 52900 51430 1470 U

NOI 18640 20570 1930 U

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