Question

1. Why is a flexible budget much more informative for comparison than a static budget?
   
2. At the beginning of the year, Long, Inc. estimates factory overhead to be $50,000 based on 40,000 units. Long believes there is $1 variable overhead per unit produced and $10,000 fixed costs. At the end of the year, 62,000 units were produced at a cost of $80,000.
   • What amount would a flexible budget estimate for total factory overhead at a production level of 62,000 units?
   • What portion of the $30,000 variance is due to activity?
   • What portion of the $30,000 variance is due to spending?

Answer 1

Static budgets are prepared for a planned level of activity but flexible budgets are prepared for various level activity and shows comparative cost at various level. Static budget is better to plan a estimated cost but flexible budgets are useful to control the cost incurred at various level.If actual level of activity differed from the activity planned under static budgets than it would be misleading to compare the actual results. Flexible budgets provide us flexibility in planning the various level of activity and it become easier to us to compare and analysis the actual results.

FLEXIBLE BUDGET ESTIMATE AT LEVEL OF 62000 UNITS:

Fixed Cost = 10000

Variable costs = 62000 * 1 = 62000

Total Factory overhead estimates = 62000+10000 = 72000

Total variance = 50000 - 80000 = 30000 Unfavorable

Portion relating to Activity variance = (Standard Quantity - Actual Quantity ) * Standard Rate

Portion relating to Activity variance = (40000-62000) * 1

Portion relating to Activity variance = 22000 Unfavorable

Portion related to Spending Variance = (Actual Quantity * Budgeted rates) - Actual Cost Incurred

Portion related to Spending Variance = (62000*1) - 70000

Portion related to Spending Variance = 8000 Unfavorable