Budget which is changed according to level of activities is known flexible budgeting.
It gives different budgeted cost for different level of activities.
A flexible budget is prepared after making difference classification of all the expenses.
They are fixed cost, variable cost and semivariable cost.
Types of flexible budgets
Tabular method
Segregation method
Budgeted allowance basis
Overhead variance
Step for calculation flexible budget
Determine range of activity
Identification of cost behavior
Select the level of activity
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Overhead cost is the aggregate sum of indirect materials, indirect labour and indirect expenses, which cannot be separated from products or ser.
It is also known overhead variances.
“Standard Costing” chapter explains direct materials and direct labour.
Under this chapter, we calculate overhead costing.
The different between actual manufacturing cost and standard overhead cost is known overhead variance.
Overhead cost variance is under or over absorption of overhead.
According to the Institute of Cost and Management Accountants, “Overhead is an aggregate of indirect materials, indirect wages and indirect expenses.”
There are four types of overhead variances; they are:
Two overhead variances:
Budget or controllable variance
Volume variance
Three overhead variances:
Spending or expenditure variance
Capacity variance
Efficiency variance
Four overhead variances:
Spending or Expenditure variance
Variable efficiency variance
Fixed efficiency variance
Capacity variance
Five overhead variances:
Variable spending variance
Fixed spending variance
Variable efficiency variance
Fixed efficiency variance
Capacity variance
Keep in Mind (KIM)
According to popular and use, three overhead variance is more important. 
Only three variances are studies in this chapter. 
They are spending or expenditure variance, capacity variance and efficiency variance 
It is the most important variance overhead.
It is the difference between actual overhead and budgeted overhead.
There is different between standard hours and actual worked hours.
Spending variance 
= Actual overhead incurred (given) 
Or 
= Budgeted overhead cost – Actual overhead 
Or 
= [Standard FC + standard VC] – [Standard FC + (VCPU × AQ)] 
Where:
VCPU = variable cost per unit
FC = fixed cost
VC = variable cost
AQ = actual worked hours
Note: standard hours is not time, it is standard quantity. It may be labour hour (DLH) or machine hour
Efficiency is the ability to do something without wasted energy or effort.
Efficiency variance is the differences between standard hours and actual hours.
Efficiency variance 
= VCPU × AQ – VCPU × SQ 
Or 
= VCPU × (AQ – SQ) 
Or 
= [Standard FC + (VCPU × AQ)] – [Standard FC + (VCPU × SQ)] 
Where:
VCPU = variable cost per unit
AQ = actual quantity
SQ = standard quantity
It is also called volume variance.
It is the difference between budgeted fixed overhead and actual fixed overhead.
It can be calculated variable cost as well as fixed cost.
Capacity variance 
= Budgeted fixed overhead – Actual fixed overhead 
Or 
= [Standard FC + (VCPU × SQ)] – [SR × SQ] 


Where: 

FC 
= fixed cost 
Fixed cost per unit 
= Total fixed cost ÷ Normal output 
VCPU 
= variable cost per unit 
SQ or SH 
= standard quantity or standard hours 
SR 
= standard rate (standard fixed cost per unit + standard variable cost per unit) 
SQ 
= (actual output × standard hours) ÷ standard output 

= Standard output × actual output 
Keep in Mind (KIM)
Step1, 
find out AQ, AR, FC, FCPU, VCPU, SQ and SR 

Step2, 
find out O_{1 }= Actual overhead incurred 

Step3, 
find out O_{2 }= Standard FC + ( Standard VCPU +AQ) 

Step4, 
find out O_{3 }= Standard FC + (Standard VCPU +SQ) 

Step5, 
find out O_{4 }= SR × SQ 

Step6, 
find out variances 



Spending variance 
= O_{1} – O_{2} 

Efficiency variance 
= O_{2} – O_{3} 

Capacity variance 
= O_{3} – O_{4} 

Budget variance 
= O_{1} – O_{3} 

Overhead variance 
= O_{1} – O_{4} 



Note: Negative answer favorable (F) Positive answer unfavorable (U) 

Result of Variance
Variances 
Formulas 
Answer 

Spending variance 
= [Standard FC+ standard VC] – [Standard FC + (VCPU × AQ)] 
= O_{1} – O_{2} 

Efficiency variance 
= [Standard FC + (VCPU × AQ)] – [Standard FC + (VCPU × SQ)] 
= O_{2} – O_{3} 

Capacity variance 
= [Standard FC + (VCPU × SQ)] – [SR × SQ] 
= O_{3} – O_{4} 

Budget variance 
= Spending variance – Efficiency variance 
= O_{1} – O_{3} 

Overhead variance 
= Actual variance – Budgeting overhead 
= O_{1} – O_{4} 



Where: 

AR 
= actual overhead incurred 

FC 
= standard fixed cost 

FCPU 
= standard fixed cost ÷ normal output 

VCPU 
= given or std. variable cost ÷ std. output 


= variable cost ÷ normal output (If standard output is not given) 

SR 
= standard overhead rate = FCPU + VCPU 

AQ 
= actual worked hours (units or quantity) 

SQ 
= Standard time allowed or quantity 


= given or Actual output × Standard time per unit 

Keep in Mind (KIM)
If fixed cost actual fixed cost and standard fixed cost are not given in the question, 
Fixed cost is taken in place of standard fixed cost. 
Calculation of Overhead
O_{1} 
Actual overhead incurred 
Actual fixed cost + Actual variable cost 
$ 
O_{2} 
Standard FC + (VCPU × AQ) 

$ 
O_{3} 
Standard FC + (VCPU × SQ) 

$ 
O_{4} 
SR × SQ 

$ 
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4A
The following extracted data are taken from BM Metal Casting:
Normal capacity 
10,000 MH 
Standard hours 
8,500 
Fixed cost 
$100,000 
Actual worked hours 
8,600 
Variable cost 
$200,000 
Actual expenses incurred 
$280,000 
Required: (a) Spending variance; (b) Efficiency variance; (c) Capacity variance
[Answer: (a) $(8,000) F; (b) $2,000 U; (c) $15,000 U]
SOLUTION:
Given and working note:
AQ 
= actual worked hours (MH) 
= 8,600 MH 


AR 
= actual overhead (actual FC + actual VC) 
= given 
= $280,000 

FC 
= standard fixed cost 
= $100,000 


FCPU 
= standard fixed cost ÷ normal output 
= 100,000 ÷ 10,000 
= $10 

VCPU 
= given or std. variable cost ÷ std. output 
= 200,000 ÷ 25,000 
= $20 

SR 
= standard rate (FCPU + VCPU) 
= 10 + 20 = $30 


SQ 
= given 
= 8,500 MH 




Again 

O_{1} 
Actual overhead incurred 
Given 
280,000 

O_{2} 
Standard FC + (VCPU × AQ) 
100,000 + (20 × 8,600) 
272,000 

O_{3} 
Standard FC + (VCPU × SQ) 
100,000 + (20 × 8,500) 
270,000 

O_{4} 
SR × SQ 
30 × 8,500 
255,000 



Now, 

Spending variance 
= O_{1} – O_{2} 
= 280,000 – 272,000 
= (8,000) F 

Efficiency variance 
= O_{2} – O_{3} 
= 272,000 – 270,000 
= 2,000 U 

Capacity variance 
= O_{3} – O_{4} 
= 270,000 – 255,000 
= 15,000 U 

######
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Accounting Equation 

Journal Entries in Nepali 

Journal Entries 

Journal Entry and Ledger 

Ledger 

Subsidiary Book 

Cashbook 

Trial Balance and Adjusted Trial Balance 

Bank Reconciliation Statement (BRS) 

Depreciation 



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Accounting Process 

Accounting for Long Lived Assets 

Analysis of Financial Statement 
######
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4B
The following extracted data are taken from Butwal Metal Casting:
Normal capacity 
16,000 hours 
Standard man hours per unit 
240 hours 
Actual output 
50 units 
Actual worked hours 
12,400 
Fixed cost 
$64,000 
Actual expenses incurred 
$260,000 
Standard total overhead rate 
$20 


Required: (a) Spending variance; (b) Efficiency variance; (c) Capacity variance
[Answer: (a) $(2,400) F; (b) $6,400 U; (c) $16,000 U]
SOLUTION:
Given and working note:
AQ 
= actual worked hours (MH) 
= 12,400 hours 


AR 
= actual overhead (actual FC + actual VC) 
= given 
= $130,000 

FC 
= standard fixed cost 
= $64,000 


FCPU 
= standard fixed cost ÷ normal output 
= 64,000 ÷ 16,000 
= $4 

SR 
= standard rate (FCPU + VCPU) 
= $20 given 


VCPU 
= SR – FCPU 
= 20 – 4 
= $16 

SQ 
= Actual output × Standard time per unit 
= 50 units × 240 hours 
= 12,000 hours 

_{ } Again 

O_{1} 
Actual overhead incurred 
Given 
260,000 

O_{2} 
Standard FC + (VCPU × AQ) 
64,000 + (16 × 12,400) 
262,400 

O_{3} 
Standard FC + (VCPU × SQ) 
64,000 + (16 × 12,000) 
256,000 

O_{4} 
SR × SQ 
20 × 12,000 
240,000 



Now, 

Spending variance 
= O_{1} – O_{2} 
= 260,000 – 262,400 
= (2,400) F 

Efficiency variance 
= O_{2} – O_{3} 
= 262,400 – 256,000 
= 6,400 U 

Capacity variance 
= O_{3} – O_{4} 
= 256,000 – 240,000 
= 16,000 U 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4C
The following extracted data are taken from KK Metal Company:
Actual 
Standard (budgeted) 

Output 
9,000 units 
Output 
10,000 units 
Variable cost 
$405,000 
Variable cost per unit 
$9 
Fixed cost 
$122,000 
Fixed cost 
$120,000 
Machine hour 
40,500 
1 unit require 
4 machine hour 
Normal output 40,000 units
Required: (a) Spending variance; (b) Efficiency variance; (c) Capacity variance
[Answer: (a) $42,500 U; (b) $40,500 U; (c) $12,000 U]
SOLUTION:
Given and working note:
AQ 
= actual worked hours (MH) 
= 40,500 MH 


AR 
= actual overhead (actual FC + actual VC) 
= 122,000 + 405,000 
= $527,000 

FC 
= standard fixed cost 
= $120,000 


FCPU 
= standard fixed cost ÷ normal output 
= 120,000 ÷ 40,000 
= $3 

VCPU 
= given or std. variable cost ÷ std. output 
= 100,000 ÷ 25,000 
= $9 

SR 
= standard rate (FCPU + VCPU) 
= 3 + 9 
= $12 

SQ 
= actual output × standard time 
= 9,000 × 4 
= 36,000 hours 



Again 

O_{1} 
Actual overhead incurred 
Actual VC + Actual FC 
527,000 

O_{2} 
Standard FC + (VCPU × AQ) 
120,000 + (9 × 40,500) 
484,500 

O_{3} 
Standard FC + (VCPU × SQ) 
120,000 + (9 × 36,000) 
444,000 

O_{4} 
SR × SQ 
12 × 36,000 
432,000 



Now, 

Spending variance 
= O_{1} – O_{2} 
= 527,000 – 484,500 
= $42,500 U 

Efficiency variance 
= O_{2} – O_{3} 
= 484,500 – 444,000 
= $40,500 U 

Capacity variance 
= O_{3} – O_{4} 
= 444,000 – 432,000 
= $12,000 U 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4D
The flexible budgeting data and other information have been presented below by EP Company:
Budgeted allowance (BA) 
= Fixed cost + VCPU × level of activity 

= $60,000 + $20 × DLH 


Normal capacity 
60,000 DLH 
Standard time for per unit 
5 DLH 
Units produced 
10,000 units 
Labour hours paid 
55,000 DLH 
Actual overhead cost paid 
$245,000 
Required: (a) Spending variance; (b) Efficiency variance; (c) Capacity variance
[Answers: SV = (35,000) F; EV = 20,000 U; CV = 10,000 U]
SOLUTION:
Given and working note:
AQ 
= actual worked hours 
= 55,000 DLH 


AR 
= actual overhead incurred 
= $245,000 


FC 
= standard fixed cost 
= $60,000 


FCPU 
= standard fixed cost ÷ normal output 
= 60,000 ÷ 60,000 
= $1 

VCPU 
= variable cost per unit = $20 ÷ 5 DLH 
= $4 


SQ 
= actual output × standard time 
= 10,000 units × 5 DLH 
= 50,000 DLH 

SR 
= standard rate (FCPU + VCPU) 
= 1 + 4 
= $5 



Again 

O_{1} 
Actual overhead incurred 
Given 
245,000 

O_{2} 
Standard FC + (VCPU × AQ) 
60,000 + (4 × 55,000) 
280,000 

O_{3} 
Standard FC + (VCPU × SQ) 
60,000 + (4 × 50,000) 
260,000 

O_{4} 
SR × SQ 
5 × 50,000 
250,000 



Now, 

Spending variance 
= O_{1} – O_{2} 
= 245,000 – 280,000 
= (35,000) F 

Efficiency variance 
= O_{2} – O_{3} 
= 280,000 – 260,000 
= 20,000 U 

Capacity variance 
= O_{3} – O_{4} 
= 260,000 – 250,000 
= $10,000 U 






Note:
Variable labour cost per unit is given $20 but 1 unit needs to complete 5 DHL.
= $20 ÷ 5 DLH
= $4
Actual output produced 10,000 units but 1 unit needs to complete 5 DLH.
= actual output × standard time
= 10,000 units × 5 DLH
= 50,000 DLH
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4E
The extracted data of ABC Company are as follows:

Budgets (standard) 
Actual 

Output (in unit) 
$50,000 
$60,000 

Direct labour hours (DLH) 
$25,000 
$27,500 

Fixed overhead cost 
$25,000 
$55,000 

Variable overhead cost 
$100,000 
$137,500 

Normal output is 10,000 units
Required: (a) Spending variance; (b) Efficiency variance; (c) Capacity variance
[Answers: SV = $57,500 (U); EV = ($10,000) (F); CV = ($50,000) (F)]
SOLUTION:
Given and working note:
AQ 
= actual worked hours 
= 27,500 DLH 


AR 
= actual overhead (actual FC + actual VC) 
= 55,000 + 137,500 
= $192,500 

FC 
= standard fixed cost 
= $25,000 


FCPU 
= standard fixed cost ÷ normal output 
= 25,000 ÷ 10,000 
= $2.5 

VCPU 
= given or std. variable cost ÷ std. output 
= 100,000 ÷ 25,000 
= $4 

SQ 
= actual output × std. time ÷ std. output 
= 60,000 × 25,000÷50,000 
= 30,000 hours 

SR 
= standard rate (FCPU + VCPU) 
= 2.5 + 4 
= $6.5 



Again 

O_{1} 
Actual FC + Actual VC 
55,000 + 137,500 
192,500 

O_{2} 
Standard FC + VCPU × AQ 
25,000 + (4 × 27,500) 
135,000 

O_{3} 
Standard FC + VCPU × SQ 
25,000 + (4 × 30,000) 
145,000 

O_{4} 
SR × SQ 
6.5 × 30,000 
195,000 



Now, 

1. Overhead spending variance 
= O_{1} – O_{2} 
= 192,500 – 135,000 
= $57,500 U 

2. Overhead efficiency variance 
= O_{2} – O_{3} 
= 135,000 – 145,000 
= ($10,000) F 

3. Overhead capacity variance 
= O_{3} – O_{4} 
= 145,000 – 195,000 
= ($50,000) F 






Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4F
The flexible budgeting data and other information have been presented below:
Budgeted allowance 
= $400,000 + $8 × DLH 
Normal capacity 
80,000 DLH 
Standard time per unit of output 
2 DLH 
Actual output 
55,000 units 
Actual hours worked 
90,000 DLH 
Actual overhead paid 
$950,000 
Required: (a) Spending variance; (b) Efficiency variance; (c) Capacity variance
[Answers: SV = $24,500 (F); EV = $30,000 (F); CV = $16,000 (F)]
SOLUTION:
Given and working note:
AQ 
= actual worked hours 
= 90,000 DLH 


AR 
= actual overhead incurred 
= $750,000 


FC 
= standard fixed cost 
= $400,000 


FCPU 
= standard fixed cost ÷ normal output 
= 400,000 ÷ 80,000 
= $5 

VCPU 
= variable cost per unit 
= $8 


SQ 
= actual output × standard time 
= 55,000 units × 2 DLH 
= 111,000 DLH 

SR 
= standard rate (FCPU + VCPU) 
= 5 + 8 
= 13 



Again 

O_{1} 
Actual overhead incurred 
Given or (actual FC + actual VC) 
$9,50,000 

O_{2} 
Standard FC + (VCPU × AQ) 
400,000 + (8 × 90,000) 
$11,20,000 

O_{3} 
Standard FC + (VCPU × SQ) 
400,000 + (8 × 110,000) 
$12,80,000 

O_{4} 
SR × SQ 
13 × 110,000 
$14,30,000 



Now, 

Spending variance 
= O_{1} – O_{2} 
= 9,50,000 – 11,20,000 
= ($170,000) F 

Efficiency variance 
= O_{2} – O_{3} 
= 11,20,000 – 12,80,000 
= ($160,000) F 

Capacity variance 
= O_{3} – O_{4} 
= 12,80,000 – 14,30,000 
= ($150,000) F 






#####
Problems and Answers of Flexible Budget 
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4A
The information relating to overhead costs are given by BJ Company:
Standard capacity based on normal capacity 5,000 hours: 
Actual hours worked 
4,300 hours 

Fixed overhead 
$5,000 
Actual overhead incurred 

Variable overhead 
$5,000 
Fixed overhead 
$5,000 
Total 
$10,000 
Variable overhead 
$4,000 


Total 
$9,000 
Standard hours 
4,250 hours 


Required: Three variances
[Answer: Spending = ($300) F; Efficiency = $50 U;
Capacity = $750 U] *FCPU = $1; VCPU = $1
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4B
The compiled records of KL Company are as follows:
Activities 
Budgets (standard) 
Actual 

Output (in unit) 
10,000 
12,000 

Hours 
5,000 
5,500 

Fixed overhead cost 
$5,000 
$5,000 

Variable overhead cost 
$20,000 
$27,500 

Normal output is 5,000 units
Calculate: Three overhead Variances
[Answers: SV = $5,500 U; EV = ($2,000) F; CV = ($1,000) F;
Or SV = $5,500 U; EV = $2,000 U; CV = Nil;
* SQ = Actual output x Std hours ÷ Std output = 6,000 hours
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4C
The flexible budgeting data and other information have been presented below by BK Company:
Budgeted allowance = $400,000 + $5 x DLH 

Normal Capacity 
100,000 DLH 
Standard time per unit of output 
2 DLH 
Actual output 
52,000 units 
Actual hours worked 
98,000 DLH 
Actual overhead paid 
$865,500 
Required: Overhead three variances
[Answers: SV = $24,500 (F); EV = $30,000 (F); CV = $16,000 (F)]
*SQ = 52,000 × 2DLH = 104,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 4D
The details regarding manufacturing overhead cost and other relevant information are below by BL Company:
Actively level 
50,000 DLH 
100,000 DLH 
Manufacturing cost 
$300,000 
$400,000 
Other information: 


Normal capacity 
100,000 DLH 

Actual DLH (standard) produced 
102,000 DLH 

Actual labour worked and paid 
98,000 DLH 

Actual overhead paid 
$420,500 
Required: (1) Amount of fixed manufacturing cost; (2) Overhead three variance
[Answers: FMC = Total cost – VCPU × Output = $200,000;
SV = $24,500 (A); EV = $8,000 F; CV = $4,000 (F)]
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