Flexible budgets allow overhead costs to vary based on changes in activity levels. They separate fixed and variable costs. Variable costs change proportionally with activity, while fixed costs remain constant within the relevant range. The document demonstrates how to prepare a flexible budget for CheeseCo based on machine hours. It also shows a budget performance report that calculates variances between the flexible budget and actual results to analyze performance. Most of the $11,650 total variance was due to lower activity levels, while $3,350 was due to poor cost control of variable overhead costs.

1. Budget Flessibile

2. Flexible Budgets

3. Flexible Budgets
Central Concept
If you can tell me what your activity was
for the period, I will tell you what your costs
and revenue should have been.

4. Preparing a Flexible Budget
To a budget we need to know that:
• Total variable costs change
in direct proportion to
changes in activity.
• Total fixed costs remain
unchanged within the
relevant range. Fixed
Variable

5. Preparing a Flexible Budget
Let’s prepare
budgets
for CheeseCo.

6. Preparing a Flexible Budget
CheeseCo
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable cost 7.50$ 60,000$
Fixed costs
Depreciation 12,000$
Insurance 2,000
Total fixed cost
Total overhead costs
Fixed costs are
expressed as a
total amount.
Variable costs are expressed as
a constant amount per hour.
$40,000 ÷ 10,000 hours is
$4.00 per hour.

7. Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable cost 7.50$ 60,000$
Fixed costs
Depreciation 12,000$
Insurance 2,000
Total fixed cost
Total overhead costs
Preparing a Flexible Budget
$4.00 per hour × 8,000 hours = $32,000
CheeseCo

8. Preparing a Flexible Budget
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable cost 7.50$ 60,000$
Fixed costs
Depreciation 12,000$ 12,000$
Insurance 2,000 2,000
Total fixed cost 14,000$
Total overhead costs 74,000$ ?
CheeseCo

9. Quick Check 
What should be the total overhead costs for the
Flexible Budget at 10,000 hours?
a. $92,500.
b. $74,000.
c. $89,000.
d. $94,000.
What should be the total overhead costs for the
Flexible Budget at 10,000 hours?
a. $92,500.
b. $74,000.
c. $89,000.
d. $94,000.

10. What should be the total overhead costs for the
Flexible Budget at 10,000 hours?
a. $92,500.
b. $74,000.
c. $89,000.
d. $94,000.
What should be the total overhead costs for the
Flexible Budget at 10,000 hours?
a. $92,500.
b. $74,000.
c. $89,000.
d. $94,000.
Quick Check 
Total overhead cost
= $14,000 + $7.50 per hour × 10,000 hours
= $14,000 + $75,000 = $89,000

11. Preparing a Flexible Budget
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$ 40,000$
Indirect material 3.00 24,000 30,000
Power 0.50 4,000 5,000
Total variable cost 7.50$ 60,000$ 75,000$
Fixed costs
Depreciation 12,000$ 12,000$ 12,000$
Insurance 2,000 2,000 2,000
Total fixed cost 14,000$ 14,000$
Total overhead costs 74,000$ 89,000$
CheeseCo
Total fixed costs
do not change in
the relevant range.

12. Quick Check 
What should be the total overhead costs for the
Flexible Budget at 12,000 hours?
a. $92,500.
b. $89,000.
c. $106,800.
d. $104,000.
What should be the total overhead costs for the
Flexible Budget at 12,000 hours?
a. $92,500.
b. $89,000.
c. $106,800.
d. $104,000.

13. What should be the total overhead costs for the
Flexible Budget at 12,000 hours?
a. $92,500.
b. $89,000.
c. $106,800.
d. $104,000.
What should be the total overhead costs for the
Flexible Budget at 12,000 hours?
a. $92,500.
b. $89,000.
c. $106,800.
d. $104,000.
Quick Check 
Total overhead cost
= $14,000 + $7.50 per hour × 12,000 hours
= $14,000 + $90,000 = $104,000

14. Preparing a Flexible Budget
Cost Total Flexible Budgets
Formula Fixed 8,000 10,000 12,000
Per Hour Cost Hours Hours Hours
Machine hours 8,000 10,000 12,000
Variable costs
Indirect labor 4.00 32,000$ 40,000$ 48,000$
Indirect material 3.00 24,000 30,000 36,000
Power 0.50 4,000 5,000 6,000
Total variable cost 7.50$ 60,000$ 75,000$ 90,000$
Fixed costs
Depreciation 12,000$ 12,000$ 12,000$ 12,000$
Insurance 2,000 2,000 2,000 2,000
Total fixed cost 14,000$ 14,000$ 14,000$
Total overhead costs 74,000$ 89,000$ 104,000$
CheeseCo

15. Let’s prepare a
budget performance report
for CheeseCo.
Flexible Budget
Performance Report

16. Flexible Budget
Performance Report
Cost Total
Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor 4.00$ 34,000$
Indirect material 3.00 25,500
Power 0.50 3,800
Total variable costs 7.50$ 63,300$
Fixed Expenses
Depreciation 12,000$ 12,000$
Insurance 2,000 2,050
Total fixed costs 14,050$
Total overhead costs 77,350$
Flexible budget is
prepared for the
same activity level
(8,000 hours) as
actually achieved.
CheeseCo

17. Quick Check 
What is the variance for indirect labor when the
flexible budget for 8,000 hours is compared to
the actual results?
a. $2,000 U
b. $2,000 F
c. $6,000 U
d. $6,000 F
What is the variance for indirect labor when the
flexible budget for 8,000 hours is compared to
the actual results?
a. $2,000 U
b. $2,000 F
c. $6,000 U
d. $6,000 F

18. What is the variance for indirect labor when the
flexible budget for 8,000 hours is compared to
the actual results?
a. $2,000 U
b. $2,000 F
c. $6,000 U
d. $6,000 F
What is the variance for indirect labor when the
flexible budget for 8,000 hours is compared to
the actual results?
a. $2,000 U
b. $2,000 F
c. $6,000 U
d. $6,000 F
Quick Check 

19. Cost Total
Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U
Indirect material 3.00 24,000
Power 0.50 4,000
Total variable costs 7.50$ 60,000$
Fixed Expenses
Depreciation 12,000$ 12,000$
Insurance 2,000 2,000
Total fixed costs 14,000$
Total overhead costs 74,000$
Flexible Budget
Performance Report
CheeseCo

20. Quick Check 
What is the variance for indirect materials when
the flexible budget for 8,000 hours is compared
to the actual results?
a. $1,500 U
b. $1,500 F
c. $4,500 U
d. $4,500 F
What is the variance for indirect materials when
the flexible budget for 8,000 hours is compared
to the actual results?
a. $1,500 U
b. $1,500 F
c. $4,500 U
d. $4,500 F

21. What is the variance for indirect materials when
the flexible budget for 8,000 hours is compared
to the actual results?
a. $1,500 U
b. $1,500 F
c. $4,500 U
d. $4,500 F
What is the variance for indirect materials when
the flexible budget for 8,000 hours is compared
to the actual results?
a. $1,500 U
b. $1,500 F
c. $4,500 U
d. $4,500 F
Quick Check 

22. Flexible Budget
Performance Report
Cost Total
Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000
Total variable costs 7.50$ 60,000$
Fixed Expenses
Depreciation 12,000$ 12,000$
Insurance 2,000 2,000
Total fixed costs 14,000$
Total overhead costs 74,000$
CheeseCo

23. Quick Check 
What is the variance for depreciation when the
flexible budget for 8,000 hours is compared to
the actual results?
a. $0
b. $1,000 F
c. $2,000 U
d. $2,000 F
What is the variance for depreciation when the
flexible budget for 8,000 hours is compared to
the actual results?
a. $0
b. $1,000 F
c. $2,000 U
d. $2,000 F

24. What is the variance for depreciation when the
flexible budget for 8,000 hours is compared to
the actual results?
a. $0
b. $1,000 F
c. $2,000 U
d. $2,000 F
What is the variance for depreciation when the
flexible budget for 8,000 hours is compared to
the actual results?
a. $0
b. $1,000 F
c. $2,000 U
d. $2,000 F
Quick Check 

25. Cost Total
Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor 4.00$ 32,000$ 34,000$ $ 2,000 U
Indirect material 3.00 24,000 25,500 1,500 U
Power 0.50 4,000 3,800 200 F
Total variable costs 7.50$ 60,000$ 63,300$ $ 3,300 U
Fixed Expenses
Depreciation 12,000$ 12,000$ 12,000$ 0
Insurance 2,000 2,000 2,050 50 U
Total fixed costs 14,000$ 14,050$ 50 U
Total overhead costs 74,000$ 77,350$ $ 3,350 U
Flexible Budget
Performance Report
CheeseCo

26. Remember the question:
“How much of the totalvariance is due to activityand how much is due to
cost control?”
Flexible Budget
Performance Report

27. Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Ind irect labor 40,000$ 34,000$ $6,000 F
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,050 50 U
Total overhead costs 89,000$ 77,350$ $11,650 F
Static Budgets and Performance
How much of the $11,650 is due to activity
and how much is due to cost control?

28. Flexible Budget
Performance Report
Difference between original static budget
and actual overhead = $11,650 F.
Overhead Variance Analysis
Static Actual
Overhead Overhead
Budget at at
10,000 Hours 8,000 Hours
89,000$ 77,350$
Let’s place
the flexible
budget for
8,000 hours
here.

29. Flexible Budget
Performance Report
Overhead Variance Analysis
This $15,000F variance is
due to lower activity.
Activity
This $3,350U flexible
budget variance is due
to poor cost control.
Cost control
Static Flexible Actual
Overhead Overhead Overhead
Budget at Budget at at
10,000 Hours 8,000 Hours 8,000 Hours
89,000$ 74,000$ 77,350$

30. Flexible Budget
Performance Report
What causes
the cost
control variance?
There are two primary
reasons for unfavorable
variable overhead variances:
1. Spending too much for
resources.
2. Using the resources
inefficiently.