Chapter 9.

Flexible Budgets. Variance Analysis.

M11-Chp-10-1-Flex-Bud-Variances-2011-0514
Edited May 24, 2011.
Copyright © 2011, Dr. Howard Godfrey

This file contains illustrative problems that

will be used in the lecture to illustrate
important concepts and procedures.

Copyright 2011. Dr. Howard Godfrey – M11-Chp-9-1-Flex-Bud-Variances-2011-0514 1

After studying Chapter 9, you should be able to:
LO1 Prepare a flexible budget.
LO2 Prepare a report showing activity variances.
LO3 Prepare a report showing revenue and
spending variances.
LO4 Prepare a performance report that combines
activity variances and revenue and spending
variances.
LO5 Prepare a flexible budget with more than one
cost driver.
LO6 Understand common errors made in preparing
performance reports based on budgets and
actual results. 2
1: Prepare a
flexible
budget
3
I planned a vacation to Orlando, which is
400 miles, or 800 miles round trip. Auto gets
20 miles per gallon, so I expected to buy 40
gallons at $3.00 per gallon. My budget for
gas cost for this vacation was $120.
I changed my mind and went to Atlanta
which is 400 miles, round trip.
My gas cost was $69.20 for 21 gallons, and I
am bragging about keeping my gas price
below the budgeted amount of $120.
How was my efficiency going to Atlanta? 4
 Vacation Disney Atlanta Atlanta
Miles 800 400 400
Plan-Miles per gallon 20 20 20
Number of Gallons 40 20
Cost per gallon $3.00 $3.00
Expected Cost $120.00 $60.00
Actual Cost
5
 Vacation Disney Atlanta Atlanta
Miles 800 400 400
Plan-Miles per gallon 20 20 20
Number of Gallons 40 20 21
Cost per gallon $3.00 $3.00 $3.30
Expected Cost $120.00 $60.00
Actual Cost $69.20
6
Factory Budget Output Levels
Slide 1 per Unit Output Output
Units 6,000 8,000
Sales $30
Var. Costs
Materials $48,000
Labor $3
Fixed Costs
Deprec. $16,000
Salaries $42,000
7
Factory Budget Output Levels
Slide 2 per Unit Output Output
Units 6,000 8,000
Sales $30 $180,000
Var. Costs
Materials $48,000
Labor $3
Fixed Costs
Deprec. $16,000
Salaries $42,000
8
 Budget Output Levels
Slide 3 per Unit Output Output
Units 6,000 8,000
Sales $30 $180,000 $240,000
Var. Costs
Materials $8 $48,000
Labor $3
Fixed Costs
Deprec. $16,000
Salaries $42,000
9
 Budget Output Levels
Slide 4 per Unit Output Output
Units 6,000 8,000
Sales $30 $180,000 $240,000
Var. Costs
Materials $8 $48,000 $64,000
Labor $3 $18,000 $24,000
Fixed Costs
Deprec. $16,000
Salaries $42,000
10
 Budget Output Levels
Slide 5 per Unit Output Output
Units 6,000 8,000
Sales $30 $180,000 $240,000
Var. Costs
Materials $8 $48,000 $64,000
Labor $3 $18,000 $24,000
Fixed Costs
Deprec. $16,000 $16,000
Salaries $42,000 $42,000
Total Costs $124,000 $146,000
Net Income $56,000 $94,000
Revenue increases one-third. Net Income?
 Budget Output Levels Actual
Slide 6 per Unit Output Output Results
Units sold 6,000 8,000 8,000
Sales $ $30 $180,000 $240,000 $230,000
Var. Costs
Materials $8 $48,000 $64,000 $64,000
Labor $3 $18,000 $24,000 $22,000
Fixed Exp.
Deprec. $16,000 $16,000 $16,000
Salaries $42,000 $42,000 $44,000
Total Exp. $124,000 $146,000 $146,000
Net Income $56,000 $94,000 $84,000
12
 Budget Output Levels Actual
Slide 7 per Unit Output Output Results Var.
Units sold 6,000 8,000 8,000
Sales $ $30 $180,000 $240,000 $230,000 ($10,000)
Var. Costs
Materials $8 $48,000 $64,000 $64,000 $0
Labor $3 $18,000 $24,000 $22,000 ($2,000)
Fixed Exp.
Deprec. $16,000 $16,000 $16,000 $0
Salaries $42,000 $42,000 $44,000 $2,000
Total Exp. $124,000 $146,000 $146,000

Net Income $56,000 $94,000 $84,000

13
2: Activity
variances
14
A clinic budgeted for 2,200 client-visits.
Clinic had 2,220 client-visits.
Fixed Amt. Variable Amt.
Per Month Per client visit
Revenue $69.80
Personnel Exp. $39,000 23.30
Medical Supplies 1,900 9.50
Occupancy exp. 9,800 2.10
Administrative exp. 6,700 0.40
Total Expenses $57,400 $35.30
Activity variance for personnel expense?
A. $4,024 F B. $466 F C. $466 U D. $4,024 U
15
Clinic Example Continued
Clinic budgeted for 2,200 client-visits.
Clinic had 2,220 client-visits.

Plan. budget (39,000 + 23.30 x 2,200) $90,260

Flex. budget (39,000 + 23.30 x 2,220) $90,726
Activity Variance for personnel $466
expenses

16
A clinic budgeted for 2,200 client-visits.
Clinic had 2,220 client-visits.
Fixed Amt. Variable Amt.
Per Month Per client visit
Revenue $69.80
Personnel Expense $39,000 23.30
Medical Supplies 1,900 9.50
Occupancy expense 9,800 2.10
Administrative exp. 6,700 0.40
Total Expenses $57,400 $35.30
Activity variance for net income?
A. $690 U B. $9,670 U C. $690 F D. $9,670 F
17
Clinic Example Continued
A clinic budgeted for 2,200 client-visits.
Clinic had 2,220 client-visits.
Activity variance for net operating income is:
A. $690 U B. $9,670 U C. $690 F D. $9,670 F
Revenue per client visit $69.80
Total variable expenses per client $35.30
Contribution margin per client visit $34.50
Total Fixed Expenses $57,400
Plan. budget (34.50 x 2,200 - $57,400) $18,500
Flex. budget (34.50 x 2,220 - $57,400) $19,190
Activity Variance- Net Income $690
18
Raleigh Corp. has developed the following
flexible-budget formulas for annual indirect-labor
cost:
Total annual indirect labor cost = $4,800 + $0.50
per machine hour.
Operating budgets for the current month are
based upon 19,200 hours of planned machine
time.
Indirect-labor costs included in this monthly
planning budget are:
a. $14,800 b. $10,000
c. $14,400 d. $10,400 19
 Raleigh Flexible Budgeting
Annual Cost Formula:
Cost = $4,800 + $0.50 per machine hour
Budget: 19,200 machine hours of work.
Cost for
Hours Rate Month
Variable
Indirect Labor
Fixed
Indirect Labor
Total budget
20
 Raleigh Flexible Budgeting
Annual Cost Formula:
Cost = $4,800 + $0.50 per machine hour
Budget: 19,200 machine hours of work.
Cost for
Hours Rate Month
Variable
Indirect Labor 19,200 $0.50 $9,600
Fixed
Indirect Labor $400
Total budget $10,000
21
3: Revenue and
spending
variances
22
 Performance Report
• Please look at each line in the report on
the next page and give an evaluation of
whether the company did a good job in
controlling the expense.
• If they sell less than they planned, would
you expect that to be a reason for lower
expenses, such as lower sales
commissions?
• This is the idea of a flexible budget.

23
 Performance Report -1-Not good
Budget Actual Variance
Units Sold 10,000 9,000 1,000
Sales in Dollars $ 300,000 $ 270,000 $ 30,000
Variable Expenses
Variable MFG expenses 200,000 180,000 20,000
Shipping Expenses (sales) 5,000 4,800 200
Administrative Expenses 3,000 2,800 200
Total Variable Expenses 208,000 187,600 20,400
Contribution Margin 92,000 82,400 9,600
Fixed Expenses
Fixed Manufacturing 37,000 37,300 (300)
Fixed Selling and Admin 33,000 33,000 -
Total Fixed Expenses 70,000 70,300 (300)
Operating Income (Loss) 22,000 12,100 9,900

24
 Performance Report -2
Budget Budget Actual Variance
Units Sold 10,000 90% 9,000
Sales in Dollars $300,000 $270,000
Variable Expenses
Variable MFG expenses 200,000 180,000
Shipping Exp. (sales) 5,000 4,800
Admin. Expenses 3,000 2,800
Total Variable Exp. 208,000 187,600
Contribution Margin 92,000 82,400
Fixed Expenses
Fixed Manufacturing 37,000 37,300
Fixed Selling & Admin 33,000 33,000
Total Fixed Expenses 70,000 70,300
Operating Income (Loss) $22,000 $12,100

25
 Performance Report -3-Better
Units Sold Budget Budget Actual Variance
10,000 90% 9,000
Sales in Dollars $300,000 270,000 $270,000
Variable Expenses
Variable MFG expenses 200,000 180,000 180,000
Shipping Exp. (sales) 5,000 4,500 4,800 300
Admin. Expenses 3,000 2,700 2,800 100
Total Variable Exp. 208,000 187,200 187,600 400
Contribution Margin 92,000 82,800 82,400 (400)
Fixed Expenses
Fixed Manufacturing 37,000 37,000 37,300 300
Fixed Selling & Admin 33,000 33,000 33,000 0
Total Fixed Expenses 70,000 70,000 70,300 300
Operating Income (Loss) $22,000 $12,800 $12,100
Comment on Admin. Expenses- Good or bad variance?
26
 Flexible Budget - Income Statement - 1
Budget
Sales in units 10,000 9,000 8,000
Selling price per unit $40.00 $40.00 $40.00
Sales in Dollars $ 400,000 $ 360,000
Variable Expenses
Variable MFG expenses 200,000 180,000
Shipping Exp. (sales) 6,000 5,400
Admin. Expenses 2,000 1,800
Total Variable Expenses 208,000 187,200
Contribution Margin 192,000 172,800
Fixed Expenses
Fixed Manufacturing 40,000 40,000
Fixed Selling & Admin 30,000 30,000
Total Fixed Expenses 70,000 70,000
Operating Income (Loss) $122,000 $102,800
27
 Flexible Budget - Income Statement - 2
Budget
Sales in units 10,000 9,000 8,000
Selling price per unit $40.00 $40.00 $40.00
Sales in Dollars $ 400,000 $ 360,000 $ 320,000
Variable Expenses
Variable MFG expenses 200,000 180,000 160,000
Shipping Exp. (sales) 6,000 5,400 4,800
Admin. Expenses 2,000 1,800 1,600
Total Variable Expenses 208,000 187,200 166,400
Contribution Margin 192,000 172,800 153,600
Fixed Expenses
Fixed Manufacturing 40,000 40,000
Fixed Selling & Admin 30,000 30,000
Total Fixed Expenses 70,000 70,000
Operating Income (Loss) $122,000 $102,800
28
 Flexible Budget - Income Statement - 3
Budget
Sales in units 10,000 9,000 8,000
Selling price per unit $40.00 $40.00 $40.00
Sales in Dollars $ 400,000 $ 360,000 $ 320,000
Variable Expenses
Variable MFG expenses 200,000 180,000 160,000
Shipping Exp. (sales) 6,000 5,400 4,800
Admin. Expenses 2,000 1,800 1,600
Total Variable Expenses 208,000 187,200 166,400
Contribution Margin 192,000 172,800 153,600
Fixed Expenses
Fixed Manufacturing 40,000 40,000 40,000
Fixed Selling & Admin 30,000 30,000 30,000
Total Fixed Expenses 70,000 70,000 70,000
Operating Income (Loss) $122,000 $102,800 $83,600
29
 Flexible Budget- Income Statement
Notice that variable costs are budgeted
at lower amounts for lower levels of
sales.
Fixed costs remain fixed at all levels of
sales within the relevant range.
A reduction of 10% in sales is expected
to result in more than a 10% reduction
in net income. Why?
30
4: Flexible budget
performance
report

31
 Flight Café (meals for airlines)
Month Ended July 31
Budget Actual
Meals sold- Budget 10,000
Meals sold- Actual 9,000
Revenue $10 $100,000 $90,000
Expenses:
Food $4 $40,000 $38,000
Wages $2 20,000 18,500
Other variable exp. $1 10,000 9,400
Rent Expense Fixed 4,000 4,000
Insurance Expense Fixed 1,000 1,000
Total expense $75,000 $70,900
Net income $25,000 $19,100
32
 Flight Café (meals for airlines)
Variances For the Month Ended July 31
1 2
Budget Actual Variance
Meals - Budget 10,000
Meals - Actual 9,000
Revenue $10 $100,000 $90,000 $10,000
Expenses:
Food $4 $40,000 $38,000 $2,000
Wages $2 20,000 18,500 1,500
Other var. exp. $1 10,000 9,400 600
Rent Expense Fixed 4,000 4,000 0
Insurance Exp. Fixed 1,000 1,000 0
Total expense $75,000 $70,900
Net income $25,000 $19,100
Are the variances good or bad?
33
 Flight Café (meals for airlines)
Variances For the Month Ended July 31
1 2 3
Budget Activity Flex. Bud. Rev/Exp. Actual
Meals - Budget 10,000
Meals - Actual 9,000 9,000
Revenue $10 $100,000 $10,000 $90,000 $0 $90,000
Expenses:
Food $4 $40,000 $4,000 $36,000 $2,000 $38,000
Wages $2 20,000 2,000 18,000 500 $18,500
Other var. exp. $1 10,000 1,000 9,000 400 $9,400
Rent Expense Fix 4,000 0 4,000 0 $4,000
Insurance Exp. Fix 1,000 0 1,000 0 $1,000
Total expense $75,000 $7,000 $68,000 $70,900
Net income $25,000 $3,000 $22,000 $2,900 $19,100
Flexible budget shows net income that is $3,000 less. (Contribution Margin?) 34
5: More than
one cost
driver
35
6: Common
errors
36
7: Budget for
overhead
37
 Flexible Budget for Overhead-1
• The exhibit on the second following page shows a
flexible budget. The overhead application rate for
variable overhead should be unchanged within the
relevant range.
• The overhead rate for fixed overhead depends on
the “denominator level.” (like how many students
come to the dance to cover fixed band costs – earlier
example.)
• The total overhead rate also depends on the
denominator level.

38
 Flexible Budget for Overhead-2
• The exhibit on the next page shows a flexible
budget.
• Recall from our earlier use of this problem
that we used the high-low method to
compute the fixed cost element of overhead
and compute the variable overhead rate.

39
 FLEXIBLE BUDGET FOR OVERHEAD-3
UNCC Corp. operates its production department under a flexible budget
with monthly allowances at 20% intervals. Capacity is based on direct
labor hours with 1,000 direct labor hours representing 100% normal
capacity. Exhibit shows budget allowance at the 80% & 100% levels.
Flexible Budget Costs Budgeted
at Various Output Levels Fixed O.H
ACTIVITY: 80% 100% 90%
Direct labor hours 800 1,000 900
Direct labor costs - at $10 per hour $8,000 $10,000 $ 9,000
COSTS:
Foreman's salary $3,000 $3,000
Indirect labor 2,800 3,000
Depreciation 1,000 1,000
Power 720 800
Total overhead $7,520 $7,800
Total Factory OH rate per hour: $9.40 $7.80
40
 Flexible Budget for Overhead-4
Flexible Budget Costs Budgeted
at Various Output Levels Fixed O.H
ACTIVITY: 80% 100% 90%
Direct labor hours 800 1,000 900
Direct labor costs - at $10 per hour $8,000 $10,000 $ 9,000
COSTS:
Foreman's salary $3,000 $3,000 $3,000 $3,000
Indirect labor 2,800 3,000 2,900 2,000
Depreciation 1,000 1,000 1,000 1,000
Power 720 800 760 400
Total overhead $7,520 $7,800 $7,660 $6,400
Total Factory OH rate per hour: $9.40 $7.80 8.5111
Capacity used for determining overhead rate (100%) - Hours 1,000
Standard fixed factoryOH rate per hour (Capacity is 100%) $ 6.40
Standard variable factory overhead rate per hour $ 1.40
41
 Flexible Budget for Overhead-5
• Note on the next page that we budgeted fixed
overhead to be $6,400. When the period was over,
we found that we spent $6,500 for fixed overhead
items. That is a spending problem.
• We produced enough product to justify using 900
hours of labor, but we actually used 910 hours of
labor. That is an efficiency problem. This involves a
waste of payroll dollars, but it also involves a waste
of support costs (the support costs for the extra 10
hours of work that was wasted.) Etc.

42
 Flexible Budget for Overhead-6
• Our total overhead for 900 good hours of work
should be:
(900 good hours X ($6.40 + $1.40))
That would be $7,020.
• We actually spent $8,000 for overhead
($1,500 + $6,500)
• Our overall budget variance is $980.
• What are the specific reasons for this variance.
• One reason: we planned on operating 1,000 hours,
but only had 900 standard hours of work. (Too few
persons came to the dance)

43
 Flexible Budget for Overhead-7
Actual variable overhead for October was 1,500
Actual fixed overhead for October was 6,500
Output level as % of capacity 90%
Standard Hours 900
Actual hours required for the output 910
Required:
1. Detailed flexible budget for 90% level. (Fill in blanks above).
$ 6,400 2. Total amount of budgeted fixed overhead.
$ 6.40 3. Standard fixed OH rate per hour, assuming the
denominator activity level is full capacity.
$ 1.40 4. Standard variable overhead rate per hour.
$ 980 5. Total overapplied or underapplied overhead for October.
(Actual factory output was at the 90% level).
$ (14.00) 6. Variable overhead efficiency variance. (Also F. or U.?)
(226.00) 7. Variable overhead spending variance. (Also F. or U.?)
$ (100.00) 8. Labor Efficiency Variance (Also F. or U.?)

44
 Flexible Budget for Overhead
Adams Corporation has developed the following
flexible-budget formulas for annual indirect-labor cost:
Annual indirect labor cost =
$4,800 + $0.50 per machine hour
Operating budgets for the current month are based
upon 20,000 hours of planned machine time.
Indirect-labor costs included in this monthly planning
budget are:
a. $14,800 b. $10,000 c. $14,400 d. $10,400

45
 Flexible Budget for Overhead
When using a flexible budget, what will occur to
variable costs (on a per unit basis) as production
increases within the relevant range?
a. Variable costs are not considered in
flexible budgeting.
b. Variable costs per unit will decrease.
c. Variable costs per unit will increase.
d. Variable costs per unit will remain
unchanged.

46
The End

47