Question

can you please elaborate on how you got the flexible budget values?

Answer 1

A flexible budget is a budget that adjusts or flexes with changes in operations or volume or activity. The flexible budget is more sophisticated and useful than a static budget because the static budget amounts do not change. They remain unchanged from the amounts established at the time the static budget was prepared and approved.

For costs that vary with volume or activity, the flexible budget will flex because the budget will include a variable rate per unit of activity instead of one fixed total amount. In short, the flexible budget is a more useful tool when measuring a manager's efficiency.

A flexible budget is helpful to compute variances that can help you understand why actual results differed from your expectations. A flexible budget adjusts the master budget for your actual sales or production volume.

Some illustrative example of flexible budget:

We can assume that a company's cost of electricity will vary by approximately $10 for each machine hour (MH) used. It also knows that other costs are fixed costs of operations of approximately $25,000 per month. Typically, if the machine hours are between 4,000 and 7,000 hours per month. now if the actual machine hours for the month of april is 5500 machine hours ; Then based on this information, the flexible budget for each month would be $25,000 + $10 x 5500 MH.

Separate fixed and variable costs:

Some costs are variable — they change in response to activity levels — while other costs are fixed and remain the same. For example, direct materials are variable costs because the more goods you make, the more materials you need.

On the other hand, some overhead costs, such as supervisory salaries, rent, and depreciation are fixed; no matter how many units you make, these costs stay the same. To determine whether a cost is variable or fixed, we will have to think about the nature of the cost.

How to get the Flexible Budget values: we'll get the values in the flexible budget by taking an example-

ABC Inc.
Overhead Budget
Budgeted Production 1,00,000 units
Indirect Labour	$50000
Indirect Material	$40000
Store man Salary	$50000
Rent	$60000
Utilities	$25000
Depreciation exp	$40000
Total Exp	$265000

Actual sales for ABC Inc. came to 125,000 units. For each category of overhead, ABC Inc. computed actual overheads for 125000 units and then variances amount, identifying unfavorable variances in the overheads as follows:

Particulars	Budget	Actual	Variance	Favourable/Unfavourable
Indirect Labour	$50000	$60000	($10000)	Unfavourable
Indirect Material	$40000	$45000	($5000)	Unfavourable
Store man Salary	$50000	$55000	($5000)	Unfavourable
Rent	$60000	$60000	0	-
Utilities	$25000	$30000	($5000)	Unfavourable
Depreciation exp	$40000	$40000	0	-
Total Overhead	$265000	$290000	($25000)	Unfavourable

The above statement does not show the actual picture because there is no separation of variable and fixed costs. Now, we will first separate the variable and fixed costs, and then recompute the overheads by preparing Flexible Budget.

ABC Inc.
Overhead Flexible Budget Report (for 125000 Units)
Particulars	Budget	Actual	Variance	Favourable/Unfavourable
Variable Cost:
Indirect Labour	$62500 ($50000/100000*125000)	$60000	$2500	favourable
Indirect Material	$50000 (40000/100000*125000)	$45000	$5000	favourable
Utilities	$31250 (25000/100000*125000)	$30000	$1250	favourable
Fixed Cost:
Store man Salary	$50000	$55000	($5000)	Unfavourable
Rent	$60000	$60000	0	-
Depreciation exp	$40000	$40000	0	-
Total Overhead	$293,750	$290,000	$3750	favourable

Conclusion: So we can see that after we adjust for the change in production level, ABC Inc. variance is suddenly favorable. Actual overhead of $290,000 was $3,750 less than the $293,750 flexible budget.