September 22, 2011 at 2:38 pm
I’m slightly confused as to what figure to enter on a flexible budget for fixed costs.
In my BPP book, it states that the fixed cost amount for flexible budgets should be the same amount as the fixed budget. I can see the logic, as the fixed costs should remain the same whatever the level of activity.
However, when I view the opentuition lecture (F5 Chapter 12 Standard Costing and Basic Variance Analysis part 1), at 11.50 minutes in the guy states that the flexed fixed cost should be different, and continues to explain why.
Could someone please advise me which is correct?
Thanks.September 23, 2011 at 12:21 pm
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You are mixing two terms: “flexible” does not mean “flexed.”
Flexible: simply at budget prepared a different activity levels.
Flexed: a budget that combines ACTUAL activity level with BUDGETED costs costs and revenue per unit (‘standard cost card’ amounts).
Please look at this again in your textbook.
Now, preparing a flexed budget, the standard technique is to take the budgeted costs per unit, multiply them by the actual activity level.
If you have a “fixed OH per unit” on your cost card, this means you have absorption costing. The standard approach is to multiply this by actual activity level–this will give you a flexed fixed OH, which will be different than the original budget and the actual amounts. This difference between the budgeted and the flexed fixed costs is explained by the fixed OH volume variance (which, indeed does sound funny!).
Note: Of course, fixed costs don’t change on activity level–these fixed OH volume, capacity, and efficiency variances are only due to over/under absorption, and only for balancing the books. Nothing else!
In Marginal costing, the flexed fixed OH will be the same as budget.
You can check all of this out in your text.September 23, 2011 at 9:35 pm
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^^ Nice explanation.September 24, 2011 at 10:16 am
Thanks Steve for your explanation. I didn’t mean to type flexible, I meant flexed in both cases. However, there is still a discrepancy with the BPP book, and their use of the terms flexed and flexible seems to indicate that they view these terms to be very similar. In other words, the BPP book seems to imply that a flexed budget is a flexible budget, but the flexed is for the actual output, where flexible can be for various outputs. Is the treatment of fixed overheads in flexed and flexible budgets different though? I’ll use an example from the book to illustrate this, and then you can tell me if I’m missing something obvious!
Question 45 in BPP Practice and Revision Kit. I’m not going to type out whole question, but it asks you to “prepare a revised budget at the new level of activity using a flexible budgeting approach and briefly explain why such a revised budget should be prepared. The budgeted fixed o/h is £125,400.
Answer: The flexed budget will be based on the activity level of 90,000 units rather than the budgeted level of 95,000 units. The fixed o/h in their revised flexed budget is £125,400, same is the original budgeted amount.
Is the BPP book wrong, or am I being silly? Thanks again.September 24, 2011 at 11:13 am
I forgot to say, the question is using absorption costing!September 25, 2011 at 4:39 am
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I don’t have the BPP book, so I can’t check the reference. I know what it feels like to be frustrated about some detail of an ACCA paper–happened to me all the time at pretty much every paper. It doesn’t help that the model answers often use different techniques!
I suggest you leave it for a couple of days and come back to it later, after you’ve look at some other topics. Flexed and flexible are treated differently–think back to F2, there are multiple choice questions on this topic.
Flexible–simply a budget at different activity levels. Multiple columns. Budgeted Fixed OH remain the same in every column. Doesn’t consider anything about actual results.
Flexed budget–Is one column. Take the costs exactly from the Cost Card. Multiply this ‘Standard Cost’ by the ‘actual activity.’ Flexed answers the question, “Should Cost,’ vs. Actual which answers “did cost.”
Fixed OH Original budget: what the plan was
Fixed OX Flexed budget: Absorption cost per unit*actual production (this will be different to the original budget due to over/under absorption)*
Actual Fixed OH- Actual results.
* this is the standard ACCA treatment, you could put budgeted OH there as well and this would be fine, but you wouldn’t have a volume variance then.September 25, 2011 at 9:57 am
Thanks again Steve, that’s very helpful.
It didn’t occur to me to check the F2 book, so I’ve just dug it out! Interestingly, the index points towards page 273 for flexed budgets. However, although it describes the flexed budget on that page, it omits the word flexed!
It starts by explaining that flexible budgets can be used in two ways. (a) At the planning stage (which is what you described as the flexible budget) (b) it explains they can be used retrospectively (which is what you described as flexed, even though they don’t use that word here). Both these explanations are under the “flexible budget” heading.
Regarding the treatment of fixed costs in the F2 book, whether it is a “flexible” or “flexed” budget, they keep the fixed overhead in the flexed budget the same amount as the original budget.
I’m not going to get bogged down in this, I’m sure it’s a tiny detail in the bigger scheme of things. However, it makes perfect sense what you explained to me above (which is the same as the opentuition lecture), so I’ll go along with that. Maybe as you said, there’s different techniques.
Thanks again for your help.September 27, 2011 at 5:47 am
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Steve … Bravo!November 12, 2011 at 4:57 am
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Please don`t confuse yourself with these easy bits concepts of F5….. let me get this straight
is the main and master budget
made at different activity levels *at start of the year
if actual activity does not match either to fixed or flexible budget then we make a flexed bugdet for actual activity *made at end of yearNovember 12, 2011 at 10:28 am
Thanks for your advice, although I wasn’t unclear about the terms. My point was, there is a discrepancy between the BPP book and the open tuition lecture, regarding the figure to be entered in the fixed cost flexed column (have a check if you have the BPP book, and you’ll see what I mean). Sorry my question was long winded, but that was all I was seeking clarification for.
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