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Flexible Budget N Overhead Variance
Flexible Budget N Overhead Variance
Lecturer
CDM.TU,
Flexible Budgeting and Overhead Cost Control
INTRODUCTION
1. Fixed Cost
2. Variable Cost
3. Semi-variable /Semi-fixed Cost
1.
Fixed Cost:
Fixed costs are those which remain constant within the given range of
activity in spite of change in volume of production. The unit fixed cost per
unit decreases as the level of production increases within the volume. In
other words, fixed cost per unit always change with the volume of
production. Salary, rent, depreciation, insurance are the examples of fixed
costs. They are the period cost, and should be incurred for a period of time.
2.
Variable Cost:
Those costs which increase directly and proportionately with the level of
activity are called variable costs. Total cost increases or decreases towards
the direction of production or sales units. Where as the variable cost per unit
will remain constant, if other thing remaining the same. Direct material,
direct labour and direct chargeable expenses are the example of variable
cost.
3.
Composition of fixed and variable cost is the mixed cost or semi variable
cost. Such costs increase with the level of activity, but by intermittent jumps
than continuously. In other words the cost does not change proportionately
with the level of output. These costs include heating, lighting, repair and
maintenance, supervision etc. It is necessary to segregate the cost between
fixed and variable for preparing flexible budget. The methods available for
segregation of mixed cost are High-low point method, Least-square method
and Scattered diagram method.
PREPARATION OF FLEXIBLE BUDGET
The following methods are used for preparing a flexible budget.
1. Multi-activity level/Tabular method
2. Formula method
1.
Tabular method:
The costs and estimated for each element of cost together with the cost
centres at the level of output determined. The organization should
determine cost behaviour-fixed, variable and semi-variable.
(c)
Level of activity
Sales units/output units
Sales Revenues Rs.
(A)
Variable Costs:
Direct material @ Rs. . . .
Direct wages @ Rs. . . .
Direct expenses @ Rs . . .
Total Variable Cost
(B)
Semi-variable Costs:
Indirect material @ Rs. . . .
Indirect wages @ Rs. . . .
Repair and maintenance @ Rs . . .
Total Semi-variable Cost
(C)
Fixed Costs:
Depreciation
Salaries
Supervision and inspection
Insurance
Other Fixed Costs
Total Fixed Costs
(D)
...%
...%
...%
Total Costs
Net Profit (Loss)
2.
(B + C + D) = E
(A E)
Formula Format:
This format provides a formula for such expense account in each responsibility centre. The
formula gives the fixed amount and the variable rate. This is more compact and generally
more useful because the components of each expenses are given. The formula format uses
straight line relationships. It is a widely used for expressing expenses budget in actual
practice. The formula is the flexible budget under formula format.
Flexible Budget
Under Formula Format Y = a + bX
Expenses
Nature
of cost
Fixed Cost/Period
Salaries
Indirect labour
Depreciation
Miscellaneous
Direct material
Total
Cost per
unit
Rs.35
12.5
10
5
6.5
2.5
3.5
Rs.75
Required
Prepare a flexible budget for the output level of 6,000 and 8,000 units using the
columnar approach.
Question 3. Out of the following expenses for a normal capacity of 10,000 units,
prepare a flexible budget for 80% and 90% output to be attained in the next month.
Direct materials ...................................................
Rs.400,000
Direct labour .......................................................
Rs.300,000
Prime costs...........................................................
Rs.700,000
Mix overheads:
Indirect expenses 30% variable and 70% fixed ...
Rs.100,000
Maintenance expenses 60% variable and 40% fixed
Rs.300,000
Salaries 100% fixed .............................................
Rs.25,000
Depreciation (fixed) .............................................
Rs.50,000
Power and fuel variable 70% and fixed 30% .......
Rs.400,000
Question 4.
Costs at two different levels of output are as follows:
Output.............................................. 3,000units 5,000units
Direct material................................. Rs.15,000 Rs.25,000
Direct labour..................................... Rs.30,000 Rs.50,000
Manufacturing overheads................. Rs.16,000 Rs.20,000
Office overheads..............................
Rs.8,000 Rs.10,000
Selling overheads.............................
Rs.3,500
Rs.4,500
Selling price per unit........................
Rs.25
Rs.25
Required
Flexible Budget for 4,000 units, showing the profit.
Question 5. Costs for two different levels of activities for the month of September 2003
have been supplied to you:
Cost elements
Levels of Activity
units
7,000
112,000
35,000
33,800
23,400
7,400
11,000
222,600
In
9,000
144,000
45,000
35,000
23,800
7,400
11,000
266,200
Required
a)
Calculate the variable cost per unit and the total fixed costs after necessary
segregation
b)
Develop the flexible budget formula & find out the total costs for 8,000 units of
output.
Question 6. The following data relates to the working of a factory at Butwal for the current
year:
Capacity worked
50%
Fixed Costs:
Salaries
84,000
Rent and Rates
56,000
Depreciation
70,000
Other administrative expenses
80,000 290,000
Variable costs:
Materials
240,000
Labour
256,000
Other expenses
38,000 534,000
Possible Sales at various levels of working are:
Capacity (%)
Sales (Rs.)
60
950,000
75
1,150,000
90
1,375,000
100
1,525,000
Prepare a flexible budget and show the forecast of profit at 60%, 75%, 90% and 100%
capacity operations.
Question 7. Kathmandu Enterprises manufacturing dressing table is working at 40%
capacity producing 10,000 tables per year. The cost elements for each table are given
as under:
Material
Rs. 20
Labour
Rs. 6
Overhead
Each table sells for Rs. 40. The selling price falls by 3% if production is at 50% capacity, and
by 5% if it worked at 90% capacity. The fall is selling prices is accompanied by similar falls in
material prices.
Required: Flexible budget showing fixed cost, variable cost and profit.
Question 8. Costs for an output level of 5,000 units in a factory are given below:
Details
Direct material
Direct labour
Variable overheads
Fixed overheads Rs.50,000
Variable expenses (direct)
Selling expenses (10% fixed)
Administrative expenses (Rs.25,000)
Cost per
unit
Rs.70
25
20
10
5
13
5
7
Rs.155
Required
Prepare a flexible budget for the output levels of 3,000 and 4,000 units using the
columnar approach.
(Ans.: Total cost (A + B) 3,000 units: Rs.500,400; 4,000 units: Rs.637,700)
Question 9. The costs for 30,000 units of a product are given below:
Direct material................................. Rs.120,000
Direct wages..................................... Rs.180,000
Direct expenses................................ Rs.60,000
Repairs and maintenance................. Rs.36,000
Insurance.......................................... Rs.45,000
Additional information:
i.
The difference in costs for repair and maintenance is Rs.0.05 per unit between
30,000 and 27,000units.
ii.
Insurance cost at 27,000 units volume amounted to Rs.42,000
Required
Flexible Budget for 25,000 and 20,000 units.
Problem 10. A company manufactures a single product for which market demand exist for
additional quantity. At present the company is utilizing only 70% of the plant capacity and
the following data are available:
Sales Revenue
Selling price per unit
Variable cost per unit
Fixed Cost
Step fixed cost
Rs.35,000
Rs.10
Rs.4
Rs.10,000
Rs.6,000
Additional information
i. At above 70% working capacity, the selling price falls by 10%
ii. The step fixed cost will remain unchanged at 60% to 80% capacity, but will increase by
Rs.1000 between 80% to 100% capacity.
Required
Flexible Budget for 80% and 90% of capacity.
Overhead Variances
Concept of Overheads
The previous chapter described the various prime cost variances regarding direct material
and direct labour cost variances and it will be recalled that the objective of that analysis was
to help management to control costs. Apart from the prime costs, other indirect expenses
may be incurred in the process of production or providing services, such expenses are
denoted by a broad term i.e. overhead expenses.
The term overhead has been defined by the Institute of Cost and Management
Accountants (CIMA) as an aggregate of indirect materials, indirect wages and indirect
expenses.
Similarly Harold J. Wheldon has defined overheads as the costs of indirect materials,
indirect labours and such other expenses including services as cannot conveniently be
charged directly to a specific cost unit.
Thus, all the indirect expenses incurred in order to bring the goods to a saleable
condition are termed as overheads or supplementary costs.
Overhead Variance
The overhead variance is the deviation from the standard costs of overhead allowed for the
actual output achieved and actual overhead costs incurred. With a view to conveying the
useful information to control the overhead expenses; overhead variances can be classified
as follows:
Step 3
Cod
e
Qty/Hour
s
A
B
C
D
S
S
A
A
Result
(Qty
Rate)
Variances
where, A, B, C, and D are code numbers. Instead of these, other symbols or letters can aso
be used
S
SFOR
S/V
A/V
FC
iii)
Question 12. Based on the following information, you are required to calculate the three
overhead variances.
Normal Capacity.......................................
10,000 direct labour hours
Standard time allowed..............................
0.5 direct labour per unit of output
Actual production......................................
22,000units
Actual hours worked.................................
10,700
Factory overhead costs incurred...............
Rs.191,000
Rs.9per hour
Question 13. The flexible budgeting data and other information have been presented
below:
BA = Rs.400,000 + Rs.5 DLH
Normal capacity 100,000DLH
Standard time per unit of output 2 DLH
Actual output 52,000 units.
Actual hours worked 98,000 DLH
Actual overheads paid Rs.865,500
Required
The three overhead variances
Question 14. The details regarding the manufacturing overhead costs and other
relevant information have been provided below:
Activity level..................................... 50,000 DLH100,000 DLH
Manufacturing costs........................ Rs.300,000 Rs.400,000
Other information
Normal capacity............................... 100,000 DLH
Actual DLH (Standard) produced..... 102,000 DLH
Actual hours worked and paid......... 98,000 DLH
Actual overheads paid..................... Rs.420,500
Required
a)
Amount of fixed manufacturing costs
b)
The three overhead variances
(TU 2058)
(Ans.: Total cost 25,000 units: Rs.375,750; 20,000 units: Rs.310,500)
Question 15. Based on the following information, you are required to calculate the three
overhead variances.
Cost Items
Fixed overheads
Variable overheads Rate
Fixed overhead rate
Working hours
Planned
Rs.90,000
Rs.9 per hour
Rs.9 per hour
11,000 hours
Actual
Rs.90,000
Rs.9.44 per hour
Rs.9 per hour
10,700 hours
Indirect labour
Supervision cost
Heat, Light and power
Depreciation
Tent and taxes
10,000
10,000
5,000
5,000
15,000
50,000
20,000
15,000
7,500
7,500
15,000
75,000
Total
Other data:
Normal capacity: 5,000 direct labour hours
Direct labour hours required for 1 unit of output: 0.5
Actual output: 11,000units
Actual hours worked: 4,750
Actual overhead costs paid: Rs.73,450
Required
a)
Construct a formula flexible budget for the company
b)
Calculate the budgeted overheads for 7,500 units
c)
Calculate the three overhead variances.
(Ans.: a) BA = Rs.25,000 + Rs.5 Output units b) Rs.62,500 c) CV = Rs.2,500 (F); EV
= Rs.7,500 (F); SV = Rs.950 (U))
=
=
Rs. 150,000
75,000
=
=
=
Rs. 75,000
50,000
25,000
Sales revenue
250
Profit
Total cost
200
BE Point
150
Variable
100
50
Cost
Loss
Fixed Cost
50
150
100
200
Quantity in units (in 000 units)
250
In this graphical presentation, 150000 units or Rs. 150,000 is the break even point where
income is equal to expenditure and there is neither profit nor loss.
STEP (MOVING) FIXED COST IN CVP ANALYSIS
Moving fixed is a kind of fixed cost which is based upon certain level of activities. Fixed cost
such as deprecation and rent, are normally remains constant for a certain level of activities.
On the other hand the fixed cost like repairs and maintenance, supervisions do change many
times between various capacity volumes. If costs are changed up on those capacity
volumes, they are known as step fixed cost.
Solution:
Assume all moving fixed costs (Repairs and supervision) as variable for sometime
Repairs cost per unit = = Rs. 2
Supervision cost per unit = = Re 1
Find out assumed CMPU:
Assumed CMPU = SP Regular VC Assumed VC = Rs. 20 12 3 = Rs. 5 per unit
Find out the range where BE possibly lies (BE range)
BE range = = = 20,000 units
Estimate fixed cost for the range
Rs.
Depreciation
80,000
Rent and rates
20,000
Repairs
40,000 (10,0004)
Supervision
20,000 (10,0002)
Total FC
16,0000
Determine Actual BE Sales volume (units)
BE Sales (units) = = = 20,000 units