Early in the chapter, girlfriend learned the a budget plan should be readjusted for alters in assumptions or sports in the level the operations. Managers use a technique known as flexible budgeting to deal with budgetary adjustments. A flexible operating spending plan is a special sort of budget that provides detailed information around budgeted expenses (and revenues) at assorted levels that output.

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Leed Company’s manufacturing overhead cost spending plan at 70% capacity is shown below. Leed can create 25,000 units in a 3 month duration or a quarter, which to represent 100% the capacity.

Leed Company 
Manufacturing Overhead Cost 
3-month Budget 
Supplies$1,400
Power 7,000
Insurance4,200
Maintenance 4,900
Depreciation 18,000
Supervision 57,000
Total Overhead Costs$92,500
Units developed (70% capacity)17,500

To keep the instance simple, we assume that the an initial four costs are strictly variable and we will certainly calculate a budget per unit because that these costs. On the various other hand, the last two costs, depreciation and also supervision, are solved costs and are assumed come be constant over the entire relevant selection of activity definition they carry out not adjust based ~ above volume. The table below shows the calculations for units developed at 70% capacity and also calculates the variable expense per unit for every variable costs.

VariableFixedCalculation
Units produced17,500 units(25,00 units x 70% capacity)
Supplies$1,400$0.08($1,400 / 17,500 units)
Power 7,000$0.40($7,000 / 17,500 units)
Insurance 4,200$0.24($4,200 / 17,500 units)
Maintenance 4,900$0.28($4,900 / 17,500 units)
Depreciation 18,000$18,000No calculation – addressed cost
Supervision 57,000$57,000No calculate – addressed cost

Now that we know the variable costs per unit. We deserve to calculate the flexible budget for any kind of level of task using this figures. Leed agency prepares a flexible budget for 70%, 80%, 90% and 100% capacity. An alert how the variable costs readjust with volume yet the fixed prices remain the same.

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Leed company
Flexible budget for Mfg Overhead
   70% capacity80% capacity90% capacity100% capacity
Volume (in units) (25,000 units x volume %) 17,500 20,000 22,250 25,000
Variable Fixed
Supplies$0.08$1,400$1,600$1,780$2,000
(17,500 devices x $0.08)(20,000 systems x $0.08)(22,250 devices x $0.08)(25,000 devices x $0.08)
Power$0.407,0008,0008,90010,000
(17,500 devices x $0.40)(20,000 devices x $0.40)(22,250 units x $0.40)(25,000 systems x $0.40)
Insurance$0.244,2004,8005,3406,000
(17,500 systems x $0.24)(20,000 devices x $0.24)(22,250 devices x $0.24)(25,000 units x $0.24)
Maintenance$0.284,9005,6006,2307,000
(17,500 systems x $0.24)(20,000 devices x $0.24)(22,250 systems x $0.24)(25,000 units x $0.24)
Depreciation$18,00018,00018,00018,00018,000
Supervision$57,00057,00057,00057,00057,000
Total Mfg Overhead$92,500$95,000$97,250$100,000

A flexible spending plan can be all set for any type of level that activity. The advantage to a flexible budget is we can produce a budget based upon the really level of manufacturing to give us a clearer photo of our results by compare the flexible spending plan to actual results. This analysis would compare the yes, really level of task so volume variances are not a factor and also management can focus on the cost variances only. We will comment on this analysis next in the power report.