Quiz 11 :
Flexible Budgeting and Analysis of Overhead Costs
Distinction between Static and Flexible Budgets: Static Budget : Static budget shows the expected results of a responsibility center for only one activity level. Once the budget is made, it is not changed, even if the activity level changes. Flexible Budget : Flexible budget shows the expected results of a responsibility center for several activity levels. The flexible budget is more accurate than the static budget because budget amounts adjust for changes in activity. The static budget is the budget that is based on this projected level of output, prior to the start of the period. In other words, the static budget is the "original" budget. The static budget variance is the difference between any line-item in this original budget and the corresponding line-item from the statement of actual results. Often, the line-item of most interest is the "bottom line": total cost of production for the factory and other cost centers; net income for profit centers. The flexible budget variance is the difference between any line-item in the flexible budget and the corresponding line-item from the statement of actual results.
Flexible Budget: Flexible budget is useful for performance appraisal. It can be prepared only at the end of the period for comparing the actual performance with estimated performance. Flexible budget enables the management to analyze deviations and take the corrective actions for performance deviations from the projected performance. If the factory actually produced 10,000 units, then management should compare actual factory costs for 10,000 units to what the factory should have spent to make 10,000 units; but not to what the factory should have spent to make 9,000 units or 11,000 units or any other production level. The flexible budget variance is the difference between any line-item in the flexible budget and the corresponding line-item from the statement of actual results. The important advantages of flexible budget are as follows: • A flexible budget enables the management to analyze the deviation of actual output from expected output. • The management can compare actual costs at the actual volume with the budgeted costs at the actual volume. • The flexible budget provides a correct basis for comparison between actual and expected costs for an actual activity. • Flexible budget helps to fulfill the objectives of cost control as it shows where the actual performance deviated from the planned performance.
Flexible Overhead Budget : The flexible overhead budgets are based on the activity levels expressed in process hours, machine hours or labor hours etc., because, in single product manufacturing environment, it makes no difference whether flexible budget is based on input or output. But in a multi-product firm, a unit of output is not a meaningful measure. Because it would be required to add a number of unlike products.