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 semi-variable 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)
Step-1, |
find out AQ, AR, FC, FCPU, VCPU, SQ and SR |
|
Step-2, |
find out O1 = Actual overhead incurred |
|
Step-3, |
find out O2 = Standard FC + ( Standard VCPU +AQ) |
|
Step-4, |
find out O3 = Standard FC + (Standard VCPU +SQ) |
|
Step-5, |
find out O4 = SR × SQ |
|
Step-6, |
find out variances |
|
|
||
Spending variance |
= O1 – O2 |
|
Efficiency variance |
= O2 – O3 |
|
Capacity variance |
= O3 – O4 |
|
Budget variance |
= O1 – O3 |
|
Overhead variance |
= O1 – O4 |
|
|
||
Note: Negative answer favorable (F) Positive answer un-favorable (U) |
||
Result of Variance
Variances |
Formulas |
Answer |
|
Spending variance |
= [Standard FC+ standard VC] – [Standard FC + (VCPU × AQ)] |
= O1 – O2 |
|
Efficiency variance |
= [Standard FC + (VCPU × AQ)] – [Standard FC + (VCPU × SQ)] |
= O2 – O3 |
|
Capacity variance |
= [Standard FC + (VCPU × SQ)] – [SR × SQ] |
= O3 – O4 |
|
Budget variance |
= Spending variance – Efficiency variance |
= O1 – O3 |
|
Overhead variance |
= Actual variance – Budgeting overhead |
= O1 – O4 |
|
|
|||
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
O1 |
Actual overhead incurred |
Actual fixed cost + Actual variable cost |
$ |
O2 |
Standard FC + (VCPU × AQ) |
|
$ |
O3 |
Standard FC + (VCPU × SQ) |
|
$ |
O4 |
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 |
||||||||
O1 |
Actual overhead incurred |
Given |
280,000 |
|||||
O2 |
Standard FC + (VCPU × AQ) |
100,000 + (20 × 8,600) |
272,000 |
|||||
O3 |
Standard FC + (VCPU × SQ) |
100,000 + (20 × 8,500) |
270,000 |
|||||
O4 |
SR × SQ |
30 × 8,500 |
255,000 |
|||||
|
||||||||
Now, |
||||||||
Spending variance |
= O1 – O2 |
= 280,000 – 272,000 |
= (8,000) F |
|||||
Efficiency variance |
= O2 – O3 |
= 272,000 – 270,000 |
= 2,000 U |
|||||
Capacity variance |
= O3 – O4 |
= 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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|
Financial Accounting and Analysis (All videos) |
|
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 |
|||||||
O1 |
Actual overhead incurred |
Given |
260,000 |
||||
O2 |
Standard FC + (VCPU × AQ) |
64,000 + (16 × 12,400) |
262,400 |
||||
O3 |
Standard FC + (VCPU × SQ) |
64,000 + (16 × 12,000) |
256,000 |
||||
O4 |
SR × SQ |
20 × 12,000 |
240,000 |
||||
|
|||||||
Now, |
|||||||
Spending variance |
= O1 – O2 |
= 260,000 – 262,400 |
= (2,400) F |
||||
Efficiency variance |
= O2 – O3 |
= 262,400 – 256,000 |
= 6,400 U |
||||
Capacity variance |
= O3 – O4 |
= 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 |
||||||||
O1 |
Actual overhead incurred |
Actual VC + Actual FC |
527,000 |
|||||
O2 |
Standard FC + (VCPU × AQ) |
120,000 + (9 × 40,500) |
484,500 |
|||||
O3 |
Standard FC + (VCPU × SQ) |
120,000 + (9 × 36,000) |
444,000 |
|||||
O4 |
SR × SQ |
12 × 36,000 |
432,000 |
|||||
|
||||||||
Now, |
||||||||
Spending variance |
= O1 – O2 |
= 527,000 – 484,500 |
= $42,500 U |
|||||
Efficiency variance |
= O2 – O3 |
= 484,500 – 444,000 |
= $40,500 U |
|||||
Capacity variance |
= O3 – O4 |
= 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 |
||||||
O1 |
Actual overhead incurred |
Given |
245,000 |
|||
O2 |
Standard FC + (VCPU × AQ) |
60,000 + (4 × 55,000) |
280,000 |
|||
O3 |
Standard FC + (VCPU × SQ) |
60,000 + (4 × 50,000) |
260,000 |
|||
O4 |
SR × SQ |
5 × 50,000 |
250,000 |
|||
|
||||||
Now, |
||||||
Spending variance |
= O1 – O2 |
= 245,000 – 280,000 |
= (35,000) F |
|||
Efficiency variance |
= O2 – O3 |
= 280,000 – 260,000 |
= 20,000 U |
|||
Capacity variance |
= O3 – O4 |
= 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 |
||||||||
O1 |
Actual FC + Actual VC |
55,000 + 137,500 |
192,500 |
|||||
O2 |
Standard FC + VCPU × AQ |
25,000 + (4 × 27,500) |
135,000 |
|||||
O3 |
Standard FC + VCPU × SQ |
25,000 + (4 × 30,000) |
145,000 |
|||||
O4 |
SR × SQ |
6.5 × 30,000 |
195,000 |
|||||
|
||||||||
Now, |
||||||||
1. Overhead spending variance |
= O1 – O2 |
= 192,500 – 135,000 |
= $57,500 U |
|||||
2. Overhead efficiency variance |
= O2 – O3 |
= 135,000 – 145,000 |
= ($10,000) F |
|||||
3. Overhead capacity variance |
= O3 – O4 |
= 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 |
||||||||
O1 |
Actual overhead incurred |
Given or (actual FC + actual VC) |
$9,50,000 |
|||||
O2 |
Standard FC + (VCPU × AQ) |
400,000 + (8 × 90,000) |
$11,20,000 |
|||||
O3 |
Standard FC + (VCPU × SQ) |
400,000 + (8 × 110,000) |
$12,80,000 |
|||||
O4 |
SR × SQ |
13 × 110,000 |
$14,30,000 |
|||||
|
||||||||
Now, |
||||||||
Spending variance |
= O1 – O2 |
= 9,50,000 – 11,20,000 |
= ($170,000) F |
|||||
Efficiency variance |
= O2 – O3 |
= 11,20,000 – 12,80,000 |
= ($160,000) F |
|||||
Capacity variance |
= O3 – O4 |
= 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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