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.
You are watching: In developing a flexible budget within a relevant range of activity,
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 |
| Insurance | 4,200 |
| 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.
| Variable | Fixed | Calculation | ||
| Units produced | 17,500 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 | $18,000 | No calculation – addressed cost | |
| Supervision | 57,000 | $57,000 | No 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% capacity | 80% capacity | 90% capacity | 100% 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 | $0.40 | 7,000 | 8,000 | 8,900 | 10,000 | |
| (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 | $0.24 | 4,200 | 4,800 | 5,340 | 6,000 | |
| (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 | $0.28 | 4,900 | 5,600 | 6,230 | 7,000 | |
| (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 | $18,000 | 18,000 | 18,000 | 18,000 | 18,000 | |
| Supervision | $57,000 | 57,000 | 57,000 | 57,000 | 57,000 | |
| 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.