Managerial Accounting Part - Flexible budgeting

A flexible overhead budget is defined as a detailed plan for monitoring cost in the firm's relevant range of activity.

A static budget is based on a particular planned level of activity. This means, the budget does not change as volume changes.

• The variable overhead cost and the activity measure should move together
• Direct labor time has traditionally been the most popular activity measure in manufacturing firms
• As automation increases, more firms are switching to machine hours or process time
• Dollar-measures, such as direct-labor or  material costs can be misleading because they are subject to price-level changes and other fluctuations

The actual labor rate per hour differs from the standard rate. 

An unfavorable variance means that the total actual cost of variable overhead is higher than expected, after adjusting for the actual quantity of machine hours used.

The spending variance is the real control variance for variable overhead.

Brings together the two different purposes of the cost accounting system.

For cost-management purposes: the cost-accounting system recognized that fixed overhead does not change as production activity varies

For product-costing purposes: budgeted fixed overhead is divided by planned activity to obtain a predetermined or standard fixed-overhead rate.

• Shows the fixed overhead budget variance along with the actual and budgeted cost for each fixed overhead item
• Shows the variable overhead spending and efficiency variances, along with the actual and budgeted cost for each variable overhead item
• The report would be used by management to exercise control over each of the overhead cost

The traditional budget: Costs are categorized as variable based on volume measures (machine hours, direct labor hours)

Activity-based flexibel budget: Costs are categorized as variable based on several cost drivers --> Costs that may seem fixed with respect to a single volume-based cost driver may be variable with respect to other non-volume related cost drivers.

The difference between the theoretical amount of inputs required to produce a unit  and the actual amount of inputs used. In manufacturing, efficiency variance can be used to analyze the effectiveness with respect to labor, materials, machine time and other production factors.

If the actual amount of inputs used exceeds the amount theoretically required, there is a negative efficiency variance. On the other hand, if actual inputs are less than the amounts theoretically required, then there would be a positive efficiency variance.

A periodic measure to quantify the difference between budgeted and actual figures for a particular accounting category. A favorable budget variance refers to positive variances or gains; an unfavorable budget variance describes negative variance, meaning losses and shortfalls. Budget variances occur because forecasters are unable to predict the future with complete accuracy.

Results when standard hours allowed for actual output differs from the denominator activity.

In a standard costing system: 

• unfavorable variance are equal to underapplied overhead
• favorable variances are equal to overapplied overhead

The sum of the overhead variances equals the under- and overapplied overhead cost of a period.

Generally, variances for direct and indirect costs are closed at the end of each period to the cost of goods sold account. Logically, those variances are also related to the ending inventories of materials, work-in-process and finished goods. The cost accounting standards board requires that part of any cost variance be assigned to the related inventories.

Sales are also subject to deviation from plans.

The two most common types of analysis focus on 

1. sales revenue
2. contribution margin

Once again the variance measures the difference between budgeted and actual amounts. But now a variance is favorable if actual exceeds budget.

Sales variances can be further divided into: 

1. Sales-price
2. Revenue sales-volume variances

Additional analyses can be carried out on: 

1. Revenue-sales mix
2. Revenue-sales quantity
3. Revenue-market size
4. Revenue-market-share variances.

Variable overhead costs fluctuate with the level of business activity (increase with higher business activity and decrease with lower business activity) where fixed overhead mostly refer to rents, salaries and insurance.