FLEXIBLE

BUDGETS AND
VARIANCE
ANALYSIS
CHAPTER 8
 1 Distinguish between flexible budgets and static budgets.

Use flexible-budget formulas to conduct a flexible budget

2 based on the volume of sales.

Objectives 3 Prepare an activity-based flexible budget.

4 Explain the performance evaluation relationship between

static budgets, flexible budgets, and actual budgets.

5 Compute activity level variance and flexible-budget

variance.
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 6 Compute and interpret price and quality variances for
inputs based on cost-driver activity.

7 Compute variable overhead spending and efficiency

variances.

Objectives 8 Compute the fixed overhead spending variance.

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What is Budgeting

Budgeting is the process where an entity

translate their operations in quantitative terms to
represent it as it’s planned operations, activities,
and production for a specific time period in
consideration.

Budgeting helps in:

• Planning operations
• Controlling operations
• Cost management​

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What is Static Budget?
A Static Budget shows that the expected
result of responsibility center for only one
activity level.

Once th budget has been determined, it is

not changed even if the activity changed.
Q1

What is Flexible Budget?

Q2 Unlike Static Budget, Flexible Budgets show
the expected result of a responsibility center
for several activity levels.

A Flexible Budget is, in effect, A series

Q3
of static budgets for different levels of
activity.

Q4

0 1 2 3 4 5 6
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Series 1 Series 2 Series 3
 Flexible Budget Based on The Volume of Sales

flexible budget formula

Level 1 Level 2 Level 3

Units of
8,000 9,000 10,000
production

Total Variable cost P45,000 P50,000 P55.500.00

Total Fixed Cost P15,000 P15,000 P15,000

Total Budget P60,000 P65,000 P70,500.00

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 “ What is the type of budgeting
system do you prepare?

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 Prepare an activity-based flexible
budget

by: Epino

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 ABB Definitions

Activity-based It is more rigorous This method is

budgeting (ABB) is a than traditional particularly useful for
method of budgeting budgeting processes, newer companies and
where activities that which tend to merely firms undergoing
incur costs are adjust previous material changes.
recorded, analyzed and budgets to account for
researched. inflation or business
development.
 The activity-based budgeting (ABB) process is broken down into
three steps.

1. Identify relevant 2. Determine the 3. Delineate the

activities. These cost number of units cost per unit of
drivers are the items
responsible for
related to each activity and
incurring revenue or activity. This multiply that result
expenses for the number is the by the activity
company. baseline for level.
calculations.

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How Does Activity-Based Budgeting Work?

Businesses strive to minimise their expenditure, and

ABB lets them take a step in the right direction. If done
effectively, ABB helps companies grow revenues and
maximise profits.

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 Explain the performance evaluation relationship
between static budgets,flexible budgets, and actual
results.

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 The key difference between the static budget and the flexible
budget is the volume or sales units used in the projections. The
static budget uses the original volume forecasted, while the flexible
budget is updated for the actual volume. For example, if during
May Year 1, the company budgeted 10,000 units, but actually sold
12,000 units, then the static budget would use 10,000 units and the
flexible budget would use 12,000 units.

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 Evaluation of Financial Performance Using Flexible Budgets We saw earlier that variances
that compare actual results to the static budget, that is, static budget variances, are not useful
for management by exception. The problem arises because two quite different factors combine
to cause such variances. Actual results might differ from the static budget because (1) sales
/production levels were not the same as originally forecasted, or (2) revenues or variable costs
per unit of activity and fixed costs per period were not expected. Although these reasons may
not be completely independent ( for example, higher unit sales prices may have caused lower
unit sales levels), it is and because it may take different management actions to correct
deficiencies in each. The flexible budget allows us to separate these two effects .

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 Accountants use variances to draw attention to unexpected
effects on actual results that managers can correct ( if the effects
are detrimental ) or enhance ( if the effects are beneficial).
Because the flexible budget adjusts both planned revenues and
costs to reflect the actual level of activity ( in our example, actual
sales volume), only departures of actual costs or revenues from
flexible-budget formula amounts cause any variances between the
flexible budget and actual results. Recall that these variances
between the flexible budget and actual results are flexible-budget
variances.

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 Example:

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TOPIC OUTLINE
-Flexible Budgets Variance
-Sales Activity Variance
-Setting Standard
-Trade Offs Among Variances
-Comparison with Prior Periods Results
-Flexible Budget Variance in Detail
Flexible Budgets Variance Flexible budget variance
is beneficial during the planning stage at the
beginning of the period. By adjusting project
budgets to a series of possible activity levels,
Finance creates data that helps anticipate the
impact of changes in activity levels on revenues
and costs.

total flexible-budget variance = total actual results- total

flexible budget
(at actual act. Level)
3Sales Activity Variance Sales activity variance, also
known as sales quantity variance, is a measure of
the change of sales over a period of time in regard
to how it affects profit or contribution.

total sales-activity variance= (actual sales unit- static budgeted

sales units ) x budgeted contribution margin per unit
 Setting Standard To establish flexible budgets,
managers must determine standard costs. A
standard cost is a carefully developed cost per unit
that should be attained.
 Trade Offs Among Variances If the operations of
organization are interrelated, the level of
performance in one area will often affect
performance in other areas. Improvements in one
area could lead to substandard performance in
another area or vice versa.
 Comparison with Prior Periods Results
Organization’s commonly used in benchmarking;
the process of comparing an organization's
performance against best performing firms.
 Flexible Budget Variance in Detail Flexible
Budget Variances in Detail breaking labor,
materials, and overhead cost flexible budget
into their component parts.
Price and Quantity
Variances

By breaking flexible-budget variances into price and quantity

variances, we can better evaluate managers on variances that
they control.
Calculate the direct material price variance if the actual
unit price and standard price per unit of direct material
are 4.00 and 4.10 respectively, and actual units of direct
material used during the period are 1,200.

Price Variances = (Actual price - Standard price) x Actual

quantity used

Actual price 4.00

- Standard price 4.10
Difference per unit 0.10
x Actual quantity 1,200
Direct material price
variance 120 favorable
The quantity variance measures how efficiently
management has used inputs.

Quantity variance = (Actual quantity used – Standard quantity

allowed for actual output x Standard cost

Actual quantity used 6,500

- Standard quantity 6,000
Difference per quantity 500
x Standard cost 4.00
Quantity variance 2,000 (Unfavorable)
Flexible Budget Variance

Flexible budget variance is the difference between the results generated

by a flexible budget model and actual results.

Flexible budget variance analysis allows you to isolate the effects of

changes in activity from the effects of changes in prices, costs, or
efficiency.
For example, a flexible budget model is designed where
the price per unit is expected to be 100. 800 units are
sold and the actual price per unit sold is 102. (calculated
as 800 units x 2 tubo per unit).

Revenue is 1,600

800 units x 100 per unit x (2 tubo per unit)

= 160,000 (Favorable)
 Interpretation of Price and Quantity Variances

Price variance is a crucial factor in budget preparation. A price

variance shows that some costs need to be addressed by
management because they are exceeding or not meeting the
expected costs.

Quantity variance is a measurement you can use to analyze the

difference between what you expect to use (standard quantity) and
what you actually use (actual quantity) in the production process.
Variable Overhead Variances

Variable overhead efficiency variance is a measure of the difference

between the actual costs to manufacture a product and the costs
that the business entity budgeted for it.

Variable Overhead Efficiency Variance = Standard Overhead Rate x

(Actual Hours – Standard Hours)
Given information:
Standard Hours = 10,000
Hours Worked = 9,000

Calculation:
Standard Overhead Rate per Hour = Cost Incurred / Standard Hours
= 100,000 / 10,000
= 10

Therefore, the company established a variable overhead rate of 10 per hour.

10 Standard Overhead Rate / Hour x (9,000 Hours Worked – 10,000 Standard
Hours)

= 10,000 (Variable Overhead Efficiency Variance)

Compute the fixed spending overhead spending
variance
Fixed overhead spending variance is the difference
between the actual fix overhead expenditures and the
budgeted amount of fixed overhead expense. An
unfavorable variance means that actual fixed overhead
expenses were greater than anticipated
This is one of the better cost accounting variances for
management to review, since it highlights changes in
cost that were note expected to change when the
fixed cost that were note expected to change whenthe
fixed cost budget was formulated.
The company lovebug Manufactures candies
• It allocates manufacturing overhead using machines
• Budgeted number of machines hours: 97,500
• Budgeted FMOH rate: $4/machine hour
• Actual number of Machine hours: 90,000
• Actual amount of FMOH (fixed manufactured overhead):
$400,000
Actual fixed Overhead Budgeted fixed overhead

$400,000 Budgeted number of machines hours – 97,500

X Budgeted FMOH rate--$4

$390,000

Spending Variance

$10,000
Computation:

To calculate the fixed overhead spending variance, subtract

budgeted fixed overhead from actual fixed overhead. The
formula for this variance is as follows:
• Actual fixed overhead-Budgeted fixed overhead
• Fixed overhead spending variance
Another example:
The production manager of Hodgson Industrial Design
Estimates that the fixed overhead should be $700,000 during
the upcoming year. However, since a production manager left
the company and was not replaced for several months, actual
expenses were lower than expected, at $672,000. This created
the following favorable fixed overhead spending variance:
Computation:

• ($672,000 Actual fixed overhead -$700,000 Budgeted fixed

overhead)
• --$28,000 fixed overhead spending variance
THANK YOU !!!