09 FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND

MANAGEMENT CONTROL
Flexible budgets are essentially budgets that can be adjusted depending
upon revenue and cost changes throughout the fiscal year, accounting
for expected unpredictability. Companies first account for the fixed
costs they expect, or at least costs that they don't expect to change as
the year progresses
What is an example of a flexible budget?
An example of a flexible budget would be a business whose rent is
always the same (a fixed cost) but whose inventory costs fluctuate (a
varying cost) based on sales. The business could use a flexible budget to
help plan its finances.
What is flexible budget and its advantages?
A flexible budget is kind of a hybrid approach to financial planning. It
begins with a static framework built from the costs that are not
anticipated to change throughout the year. Layered on top of that is a
flexible budget system allowing for variable costs to fluctuate based on
sales performance.
Variable Overhead Spending Variance is the difference between what
the variable production overheads actually cost and what they should
have cost given the level of activity during a period. The standard
variable overhead rate is typically expressed in terms of machine hours
or labor hours.
How do you calculate variable overhead spending variance?
The variable overhead rate variance is calculated as (1,800 × $1.94) – (1,800 × $2.00)
= –$108, or $108 (favorable). The variable overhead efficiency variance is calculated
as (1,800 × $2.00) – (2,000 × $2.00) = –$400, or $400 (favorable).
What is Variable Overhead Efficiency Variance? Variable overhead efficiency variance
is a measure of the difference between the actual costs to manufacture a product
and the costs that the business entity budgeted for it. Thus, it can arise from a
difference in productive efficiency.

Management control is based on a process of setting objectives,

planning, budgeting, implementing, monitoring projects, analysing
results, and taking corrective actions. The purpose of management
control is to create greater coherence within the organisation and
enhance goal congruence.