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Portmore Community College

Management Accounting
Flexible and STATIC BUDGETS

A static budget is valid for only one level of activity such as the planned level of activity. Sometimes
actual results are compared to the static budget, but such a comparison has limited usefulness.
EXAMPLE: Larch Company, which makes a single product, bases its budgets for manufacturing
overhead on the following data:
Standard cost
Variable overhead cost category per unit
Maintenance ......................................................................... $ 0.60
Indirect materials .................................................................. 1.40
Utilities ................................................................................. 1.00
Total variable cost .......................................................... $3.00
Budgeted
Fixed overhead cost category annual cost
Depreciation ......................................................................... $ 40,000
Supervision .......................................................................... 50,000
Insurance .............................................................................. 10,000
Total fixed cost .............................................................. $100,000

Larch Company originally planned to produce and sell 10,000 units during the year, but actual activity
was only 8,000 units. A report based upon the static (i.e., original) budget from the beginning of the year
follows:
LARCH COMPANY
Comparison of Actual Overhead Costs
to Budgeted Overhead Costs

Actual
Units produced and sold .................................... 8,000
Variable overhead costs:
Maintenance .................................................... $ 4,500
Indirect materials ............................................ 12,000
Utilities ........................................................... 9,500
Total variable costs ........................................ 26,000
Fixed overhead costs:
Depreciation .................................................... 40,000
Supervision ..................................................... 49,000
Insurance ......................................................... 10,000
Total fixed overhead ...................................... 99,000
Total overhead costs .......................................... $125,000

Does the above report, which is based on the original static budget, indicate whether overhead
spending was under control?
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FLEXIBLE BUDGETS

A flexible budget is geared toward all levels of activity within a range, rather than toward only one
level of activity.
A flexible budget is dynamic rather than static; it can be tailored for any level of activity within the
relevant range.

Refer to the data for Larch Company. Prepare flexible budget for three different levels of
activity ranging from 5,000, 10 000 to 15,000 units.
OVERHEAD PERFORMANCE REPORT

In a performance report focused on cost control, actual costs should be compared to the flexible
budget for the actual level of activitynot the budget for the planned level of activity.

Question : Since Larch Company produced and sold only 8,000 units instead of the 10,000 units that had
been planned, prepare a performance report based on based on the 8 000 units (we would expect
spending on variable overhead items to be less than had been planned.)
LARCH COMPANY
Overhead Performance Report

Actual
Costs
Cost Incurred
Formula 8,000
per unit Units
Variable overhead costs:
Maintenance .................................. $0.60 $ 4,500
Indirect materials ........................... 1.40 12,000
Utilities .......................................... 1.00 9,500
Total variable costs ...................... $3.00 26,000
Fixed overhead cost
Depreciation .................................. 40,000
Supervision .................................... 49,000
Insurance ....................................... 10,000
Total fixed overhead .................... 99,000
Total overhead costs ........................ $125,000