Now, let's set up my flexible budget equation, and my flexible budget equation is fixed plus
variable times X.
That is my flexible budget equation.
Fixed plus variable times X.
That's the flexible budget equation.
Now, when we do variance analysis, we're gonna use four different numbers.
As I work across, we're gonna be using four different things that we're looking at 'cause
we've gotta compare four numbers to come up with three variances.
So we're gonna start over here with actual, and the reason I like to start with actual
is because actual is always given, so we can start with actual cost.
Now the actual cost, we're gonna have our fixed, and we're gonna have our variable.
So we're gonna have our actual, which will be our fixed and our variable.
Then we're gonna have our flexible budget equation.
Now the flexible budget, this will be flexible budget equation at, since it's close to actual,
it'll be actual.
This will be our flexible budget equation at standard, and then this will be standard
at standard, which is basically what got applied into production.
Remember in another section we talked about raw materials, work in process, direct materials,
direct labor, overhead was what, applied.
That's gonna be this number.
That's what got applied.
What was that?
Remember it was basically our standard at standard.
That's what got applied into production.
That's gonna be our applied based on our predetermined overhead rates.
This is gonna be actual at actual, flexible budgeted actual, flexible budget at standard,
and this is what got applied into production.
The difference between this and this is actual and applied.
That's gonna be our net overhead variance, but we're also gonna take these and break
them down a little bit more.
Now before I go on, let me just show you how to get the 1-2-3 variance approach because
that's what we're looking at.
There's four different variances.
You could have the 4-3-2-1.
Alright, so, we've got actual cost, boom, to flexible budget at actual.
We have flexible budget at actual, boom, to flexible budget at standard, and flexible
budget at standard to what got applied.
One, two, three, four differences, gives you 1-2-3.
That's why four plus three is what?
Seven, seven, spending, efficiency, volume.
This is gonna be spending, this is gonna be efficiency, this is gonna be volume.
Spending could be both fixed and variable.
Efficiency is electricity, that's all variable.
Volume is production capacity, production volume.
Things got unapplied because what happened here is as we're doing our production, what
happened is some of your fixed overhead didn't get applied.
Therefore, the volume variance is all fixed.
So notice how four differences, four plus three is seven.
S-E-V, spending, efficiency, volume, boom.
Spending is both.
That's how you get your 1-2-3-4 variance.
Then if we take it and go from, this stays the same, it's still called your volume variance.
This goes from here to here.
This is called your budget variance.
Budget is called controllable.
Volume is called non-controllable.
Now you have the two variance approach, two.
Here's the three variance approach, and if you take this and break it out between fixed
and variable, then it's 1-2-3-4 variance approach.
So there's the four.
If you just have spending, efficiency, volume, that's the three.
If you go volume is still part of this, this is budget, which is from actual to flexible
budget at standard.
And finally, if you go from here all the way to here, that's called your net overhead variance.
So here's your one, two, three and then four variance approach.
So there's four different ways.
The net is one, this would be two, this would be three, breaking that out is four.
And you'll see a picture similar to that in your notes about page five or six or seven,
you'll see that big box there.
Actual overhead, flexible budget, flexible budget at standard and applied.
That's how we get the differences, OK?
So that's again where you'll see those differences and how they are all inter-related.