A production process is budgeted to produce 50,000 units incurring a variable cost of 2,00,000 and a fixed cost of 1,20,000 in 25,000 man hours over a 10 day period. During a period 60,000 units have been produced incurring a variable cost of 2,15,000 and a fixed cost of 1,75,000 in 33,000 hours over 11 days.

Calculate the budgeted and actual rates

Working table with the data available in the problem

	Standard	Actual	Absorbed
	Budgeted
a) Output (units) b) Periods (Days) c) Input [Time (man hrs)] d) Overhead Cost 1) Variable 2) Fixed 3) Total	50,000 10 25,000 2,00,000 1,20,000 3,20,000	60,000 11 33,000 2,15,000 1,75,000 3,33,000

The data in this illustration is used in the explanations below.

A budget is a depiction of the future activity in quantitative terms. The budget may be for a particular period or a production process.

Examples

• A production budget gives the details relating to the production that is planned to be achieved over the budgeted period.
• A production cost budget gives the details relating to the cost that would be incurred for achieving the budgeted production. This budgeted production cost includes both the variable overhead as well as the fixed overhead.

Budgeted/Normal Activity

The activity that is budgeted to be achieved over the budgeted period or process is called Budgeted Activity. The activity may be measured in terms of output, input (labor/labour time, machine hours, labour/labor cost, material cost, etc.), periods (days, weeks etc.,).

Since the budgeted activity would be the activity that should be achieved under normal circumstances, it is also called normal activity.

The three most common measures of budgeted activity that we deal with in analysing overhead variances are

• Budgeted Output ~ BO

  Budgeted Output is the output that is budgeted to be achieved over the budgeted period or process. It is the output that would have to be achieved if things go according to plans.

  It is generally expressed as units of output.

• Budgeted Input ~ BI

  By Budgeted Input we mean any one of the inputs required for carrying on the production over the budgeted period or process. It is the input that would be required for carrying on the production process as per plans.

  The most common input that we consider in variance analysis is production time.

  Budgeted Time ~ BT

  The time for which the production process is budgeted to be carried on over the budgeted period or process.

• Budgeted Periods ~ BP

  The periods into which the total time period involved in the budget is sub divided.

  The most common period that we consider in variance analysis is a day.

  Budgeted Days ~ BD

  The number of days involved in the budget period.

Budgeted (Overhead) Rates

The rates considered for absorption of overheads in preparing the budgets are what are called budgeted rates. These are nothing but the standard pre-determined rates of absorption of overheads, since budgets are always based on the standards.

The three types of absorption rates that we consider in variance analysis are

• Budgeted (Overhead) Rate Per unit output - BR/UO

  Budgeted rate per unit output

  =

  Budgeted (Overhead) Cost

  Budgeted Output units

• Budgeted (Overhead) Rate per unit input ~ BR/UI

  Budgeted rate per unit input

  =

  Budgeted (Overhead) Cost

  Budgeted Input

• Budgeted (Overhead) Rate per unit period ~ BR/UP

  Budgeted rate per unit period

  =

  Budgeted (Overhead) Cost

  Budgeted Periods

In problem solving, we will be able to calculate these rates from the budgeted cost and the output or input or period data.

The rates are distinct for Variable, Fixed and Total Overheads.

Budgeted (Overhead) Cost ~ BC

The amount of overhead cost that is budgeted to be incurred during a period or process i.e. for the Normal/Budgeted activity.

These costs are generally identifiable from the budgeted data.

The costs are distinct for Variable, Fixed and Total Overheads.

Where the cost data is not available, it may be obtained as a product of Budgeted Activity and Budgeted Rate (i.e the Pre determined rate of absorption of overhead).

Budgeted Cost ~ BC

=	BO × BR/UO Budgeted Output × Budgeted Rate per unit output
=	BT × BR/UI Budgeted Input × Budgeted Rate per unit input
=	BP × BR/UP Budgeted Periods × Budgeted Rate per unit period

This pertains to the actual data obtained.

Actual Activity

The activity that is actually achieved during the production period or process. It may be measured in terms of output, input, labor/labour time worked, machine hours worked, etc.

The three most common measures of activity that we deal with in analysing overhead variances are

• Actual Output ~ AO

  Output that has actually been achieved over the production period or process.

• Actual Input ~ AI

  The input that has been actually used for the production process.

  Production time is the most common form of input that we come across in variance analysis.

  Actual Time ~ AT

  Time for which the production process is actually carried on over the production period or process.

• Actual Periods ~ AP

  The actual periods worked for achieving the actual output.

  Day is the most common period we come across in variance analysis.

  Actual Days ~ AD

  The number of days for which the production process is actually carried on over the production period or process.

Actual (Overhead) Cost ~ AC

This is the actual overhead cost incurred. This can be ascertained only after the incurrence of the cost i.e. at the end of the period or completion of the process in consideration.

Where the cost data is not available, it may be obtained as a product of Actual measures and related Actual Rate if available.

Actual Cost ~ AC

	=	AO × AR/UO Actual Output × Actual Rate per unit output
Or	=	AI × AR/UI Actual Input × Actual Rate per unit input
Or	=	AP × AR/UP Actual Periods × Actual Rate per unit period

The actual total overhead incurred cost is distinct for Variable, Fixed and Total Overheads

Where there are Semi-Variable Costs

If semi-variable overheads form a part of the total overhead cost/expenditure, it is segregated into two, a fixed part and the other a variable part.

Since there are no tools to analyse semi-variable overheads separately, we add up the fixed part of the expense to Fixed Overhead Cost and the variable part of the expense to the Variable Overhead Cost respectively, for the purpose of variance analysis.

Therefore,

• Total Fixed Overhead Cost/Expenditure Incurred

  =	Fixed Overhead Cost + Fixed part in semi-variable overhead Cost

• Total Variable Overhead Cost Incurred

  =	Variable Overhead Cost + Variable part in semi-variable overhead Cost

	Standard	Actual	Absorbed
	Budgeted
	A	B	C
a) Output (units) b) Periods (Days) c) Input [Time (man hrs)] d) Overhead Cost 1) Variable 2) Fixed 3) Total e) Overhead Rate (/unit) 1) Variable 2) Fixed 3) Total (Ad1) ÷ (a) (Ad2) ÷ (a) (Ad3) ÷ (a) f) Overhead Rate (/unit time) 1) Variable 2) Fixed 3) Total (Ad1) ÷ (c) (Ad2) ÷ (c) (Ad3) ÷ (c) f) Overhead Rate (/period) 1) Variable 2) Fixed 3) Total (Ad2) ÷ (b)	50,000 10 25,000 2,00,000 1,20,000 3,20,000 4 2.4 6.4 8 4.8 12.8 12,000	60,000 11 33,000 2,50,000 1,75,000 3,68,000 4.17 1.97 6.13 7.58 3.58 11.15 10,727

The actual rates are calculated above to provide a theoretical understanding.

The overhead rate per period is used in analysing fixed overhead variances only and as such calculating the rate for variable and total overhead is avoided.

Where are Rates Used?

Where the cost data is available, we may not require the rates except where the absorbed overheads are to be calculated and the budgeted rates are given to be or are assumed to be the rates of absorption of overheads.

Even if required, we may only need the budgeted rates in most cases.