{"id":169,"date":"2015-09-15T16:07:05","date_gmt":"2015-09-15T16:07:05","guid":{"rendered":"https:\/\/courses.candelalearning.com\/managacct2x10xmaster\/?post_type=chapter&p=169"},"modified":"2016-01-01T14:04:34","modified_gmt":"2016-01-01T14:04:34","slug":"flexible-budgets","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-managacct\/chapter\/flexible-budgets\/","title":{"raw":"7.9 Flexible Budgets","rendered":"7.9 Flexible Budgets"},"content":{"raw":"Early in the chapter, you learned that a budget should be adjusted for changes in assumptions or variations in the level of operations. Managers use a technique known as flexible budgeting to deal with budgetary adjustments. A flexible operating budget<\/span> <\/strong>is a special kind of budget that provides detailed information about budgeted expenses (and revenues) at various levels of output.\r\n\r\nhttps:\/\/youtu.be\/JHVaey2WdPE\r\n\r\nLeed Company's manufacturing overhead cost budget at 70% capacity is shown below.\u00a0 Leed can produce 25,000 units in a 3 month period or a quarter, which represents 100% of capacity.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Leed Company\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Manufacturing Overhead Cost\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
3-month Budget\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Supplies<\/td>\r\n$1,400<\/td>\r\n<\/tr>\r\n
Power<\/td>\r\n\u00a07,000<\/td>\r\n<\/tr>\r\n
Insurance<\/td>\r\n4,200<\/td>\r\n<\/tr>\r\n
Maintenance<\/td>\r\n\u00a04,900<\/td>\r\n<\/tr>\r\n
Depreciation<\/td>\r\n\u00a018,000<\/td>\r\n<\/tr>\r\n
Supervision<\/td>\r\n\u00a0 57,000<\/span><\/td>\r\n<\/tr>\r\n
Total Overhead Costs<\/strong><\/td>\r\n$92,500<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Units Produced (70% capacity)<\/td>\r\n17,500<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nTo keep the example simple, we assume that the first four costs are strictly variable and we will calculate a budget per unit for these costs. On the other hand, the last two costs, depreciation and supervision, are fixed costs and are assumed to be constant over the entire relevant range of activity meaning they do not change based on volume.\u00a0 The table below shows the calculations for units produced at 70% capacity and calculates the variable cost per unit for all variable costs.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\n<\/td>\r\nVariable<\/strong><\/td>\r\nFixed<\/strong><\/td>\r\nCalculation<\/strong><\/td>\r\n<\/tr>\r\n
Units produced<\/td>\r\n17,500 units<\/td>\r\n<\/td>\r\n<\/td>\r\n(25,00 units x 70% capacity)<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Supplies<\/td>\r\n$1,400<\/td>\r\n$0.08<\/td>\r\n<\/td>\r\n($1,400 \/ 17,500 units)<\/td>\r\n<\/tr>\r\n
Power<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 7,000<\/td>\r\n$0.40<\/td>\r\n<\/td>\r\n($7,000 \/ 17,500 units)<\/td>\r\n<\/tr>\r\n
Insurance<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 4,200<\/td>\r\n$0.24<\/td>\r\n<\/td>\r\n($4,200 \/ 17,500 units)<\/td>\r\n<\/tr>\r\n
Maintenance<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 4,900<\/td>\r\n$0.28<\/td>\r\n<\/td>\r\n($4,900 \/ 17,500 units)<\/td>\r\n<\/tr>\r\n
Depreciation<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 18,000<\/td>\r\n<\/td>\r\n$18,000<\/td>\r\nNo calculation - fixed cost<\/td>\r\n<\/tr>\r\n
Supervision<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 57,000<\/td>\r\n<\/td>\r\n$57,000<\/td>\r\nNo calculation - fixed cost<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNow that we know the variable costs per unit. we can calculate the flexible budget for any level of activity using these figures.\u00a0 Leed Company prepares a flexible budget for 70%, 80%, 90% and 100% capacity.\u00a0 Notice how the variable costs change with volume but the fixed costs remain the same.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Leed Company\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Flexible Budget for Mfg Overhead\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n70% capacity<\/strong><\/td>\r\n80% capacity<\/strong><\/td>\r\n90% capacity<\/strong><\/td>\r\n100% capacity\r\n<\/strong><\/td>\r\n<\/tr>\r\n
Volume (in units)<\/td>\r\n\u00a0(25,000 units x capacity %)<\/span><\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 17,500<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20,000<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 22,250<\/td>\r\n\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
<\/td>\r\nVariable\r\n<\/strong><\/td>\r\n\u00a0 Fixed\r\n<\/strong><\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Supplies<\/td>\r\n$0.08<\/td>\r\n<\/td>\r\n$1,400<\/td>\r\n$1,600<\/td>\r\n$1,780<\/td>\r\n$2,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n(17,500 units\u00a0 x $0.08)<\/span><\/td>\r\n(20,000 units x $0.08)<\/span><\/td>\r\n(22,250 units x $0.08)<\/span><\/td>\r\n(25,000 units x $0.08)<\/span><\/td>\r\n<\/tr>\r\n
Power<\/td>\r\n$0.40<\/td>\r\n<\/td>\r\n7,000<\/td>\r\n8,000<\/td>\r\n8,900<\/td>\r\n10,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n(17,500 units\u00a0 x $0.40)<\/span><\/td>\r\n(20,000 units x $0.40)<\/span><\/td>\r\n(22,250 units x $0.40)<\/span><\/td>\r\n(25,000 units x $0.40)<\/span><\/td>\r\n<\/tr>\r\n
Insurance<\/td>\r\n$0.24<\/td>\r\n<\/td>\r\n4,200<\/td>\r\n4,800<\/td>\r\n5,340<\/td>\r\n6,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n(17,500 units\u00a0 x $0.24)<\/span><\/td>\r\n(20,000 units x $0.24)<\/span><\/td>\r\n(22,250 units x $0.24)<\/span><\/td>\r\n(25,000 units x $0.24)<\/span><\/td>\r\n<\/tr>\r\n
Maintenance<\/td>\r\n$0.28<\/td>\r\n<\/td>\r\n4,900<\/td>\r\n5,600<\/td>\r\n6,230<\/td>\r\n7,000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n(17,500 units\u00a0 x $0.24)<\/span><\/td>\r\n(20,000 units x $0.24)<\/span><\/td>\r\n(22,250 units x $0.24)<\/span><\/td>\r\n(25,000 units x $0.24)<\/span><\/td>\r\n<\/tr>\r\n
Depreciation<\/td>\r\n<\/td>\r\n$18,000<\/td>\r\n18,000<\/td>\r\n18,000<\/td>\r\n18,000<\/td>\r\n18,000<\/td>\r\n<\/tr>\r\n
Supervision<\/td>\r\n<\/td>\r\n$57,000<\/td>\r\n57,000<\/span><\/td>\r\n57,000<\/span><\/td>\r\n57,000<\/span><\/td>\r\n57,000<\/span><\/td>\r\n<\/tr>\r\n
Total Mfg Overhead<\/td>\r\n<\/td>\r\n<\/td>\r\n$92,500<\/td>\r\n$95,000<\/td>\r\n$97,250<\/td>\r\n$100,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nA flexible budget can be prepared for any level of activity.\u00a0 The advantage to a flexible budget is we can create a budget based on the ACTUAL level of production to give us a clearer picture of our results by comparing the flexible budget to actual results.\u00a0 This analysis would compare the actual level of activity so volume variances are not a factor and management can focus on the cost variances only.\u00a0 We will discuss this analysis next in the performance report.","rendered":"

Early in the chapter, you learned that a budget should be adjusted for changes in assumptions or variations in the level of operations. Managers use a technique known as flexible budgeting to deal with budgetary adjustments. A flexible operating budget<\/span> <\/strong>is a special kind of budget that provides detailed information about budgeted expenses (and revenues) at various levels of output.<\/p>\n