Factory Overhead Budget Budgeting Basics and Beyond Book – Conservatório Regional do Baixo Alentejo

Factory Overhead Budget Budgeting Basics and Beyond Book

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flexible budget formula

This means there is an unfavorable flexible budget variance related to the cost of goods sold of $4,000 (calculated as 800 units x $5 per unit). In aggregate, this works out to an unfavorable variance of $2,400. Sales-activity variances measure how effective managers have been in meeting the planned sales objective. https://simple-accounting.org/ In Evergreen Co., sales activity fell 2,000 units short of the planned level. The sales-activity variances (totaling Br. 18,400 U) are unaffected by any changes in unit prices or variable costs. Because the same budgeted unit prices and variable costs are used in constructing both the flexible and master budgets.

flexible budget formula

A budget variance is an accounting term that describes instances where actual costs are either higher or lower than the standard or projected costs. Prepared a flexible budget using the cost behavior data and the selected activity level. Select the activity levels for which budgets will be prepared. However, if you updated the flexible budget for actual volumes and forecasted revenue was $1,250, then when compared to actual revenue of $1,500, volume is no longer an explanation for the variance. Instead, you will have to analyze the sales mix, pricing, etc.

Budget with Varying Levels of Production

The reporting of the energy per unit of output has sometimes been in error and can mislead management into making changes that may or may not help the company. To compute the value of the flexible budget, multiply the variable cost per unit by the actual production volume. Here, the figure indicates that the variable costs of producing 125,000 should total $162,500 (125,000 units x $1.30). Skate had a great year; actual sales came to 125,000 units. However, much to the disappointment of Steve and Kira, the overhead budget report reported major overruns. For each category of overhead, Steve computed a variance, identifying unfavorable variances in indirect materials, indirect labor, supervisory salaries, and utilities. \nTo compute the value of the flexible budget, multiply the variable cost per unit by the actual production volume.

We have learned in Chapter I that managers quantify their plans in the form of budget and formal budgeting procedures result in comprehensive operational and financial budgets for future periods. These budgets guide managers and employees as they make their daily decisions and as they try to anticipate future problems and opportunities. In this chapter we focuses on how managers use flexible budgets as aids for planning and controlling. Recall that a key element of control system is feedback –the comparison of actual performance with planned performance. This chapter also provides an overview of how budgeting helps performance evaluation. Sand Box Company is choosing new cost drivers for its accounting system.


For example, your flexible budget may have three columns that show the number of units sold, the sales price, and total revenue. A flexible budget is one that takes into account your actual production and revenue rather than what you originally projected. Most businesses begin the flexible budget formula year with a static budget. This represents your best guess at what will be spent and what will be earned. Some of these include increased cost controls, the ability to measure performance of employees and managers, and being able to make adjustments according to costs and profits.

The flexible-budget variances shown in column of Exhibit 2.3 total Br. The total flexible-budget variance arises from sales prices received and the variable and fixed costs incurred. In performance evaluation, a master budget is kept fixed or static to serve as a benchmark for evaluating performance. It shows revenues and costs at only the originally planned levels of activity. However, a flexible budget will be prepared at the actual activity level. The flexible budget is identical to the master budget in format, but managers may prepare it for any level of activity. A flexible budget variance is any difference between the results generated by a flexible budget model and actual results.

8. Factory Overhead Budget

Variance analysis using flexible budget enables the managers to separate the effects of sales volume from other explanations of why the static budget was not achieved. We have identified flexible budget variance and activity level variance. The activity level variance measures the organizations effectiveness and the flexible budget variance is often a measure of efficiency though it is also affected by changes in prices and unit costs. Measuring efficiency is an important role of performance report. Fixed budgets are useful for measuring effectiveness, i.e., achievement of goal. In some cases, however, fixed budgets do not identify the question, “what should the result be, given the actual level of activity”. Actual activity may differ significantly from budgeted activity because of an unexpected labor strike, cancellation of an order, an unexpected large new production contract, and other factors.

  • To compute variances that can help you understand why actual results differed from your expectations, creating a flexible budget is helpful.
  • A flexible budget will show the variance in both revenue and spending.
  • To summarize, flexible budget can be useful either before or after the period in question.
  • While accounting software is an important part of tracking all of your financial transactions, many software applications simply don’t have the capability of preparing a flexible budget.
  • A flexible budget provides cost estimates at different levels of activity.
  • Each unit will bring in a net profit of $50, so the net profit per month will be 100 X 50, or $5,000.