variances are done in the flexible budget equation. What was the flexible budget equation

we've learned in the past? We learned total cost equals fixed plus variable times x. That's

you're flexible budget equation. Fixed plus variable times x, total cost, for fixed, plus

variable, times x. You've got your fixed overhead plus your variable overhead to...per hour,

times x is your activity level. So x is some cost driver, some activity level. So our flexible

budget equation is total cost equals fixed plus variable times x. When you're doing flexible

budget, when you do the budget, within a budget what costs are normally the same? Fixed or

fixed? Remember, within the relevant range, fixed are fixed. Variable are fixed per unit.

We're looking at the x, which is the cost driver, the activity level. So that's called

our flexible budget equation. We're trying to figure out what total cost will be at different

levels of activity, x being your cost driver. So, for doing all of our overhead analysis

using, so we're always going to compare something with the flexible budget equation, and the

way we're going to do this is, we're going to look at, on the left side, we're going

to start here with our actual overhead. Actual overhead. We're going to compare that with

our flexible budget equation at actual. We're going compare that with our flexible budget

equation at standard, and then we're going to compare that with standard of standard.

What is standard of standard. That's called applied. That's your applied overhead. That's

the overhead you applied into what? WIP. Whip it good! Remember that? WIP? Work in process.

That's the amount we applied into work in process. So, with overhead, again, don't lose

sight of the big picture...What is overhead? All the other costs in the factory except

which? Direct materials, direct labor. We already gave materials and labor. Now we're

looking at overhead. So, in the factory, what do we have? We have fixed costs, like rent,

we have variable costs, like electricity, glue, screws, nuts, bolts. So, what we're

looking at are the fixed and the variable. We're trying to look at how we did in the

factory, how we did the factory. Did we spend too much for fixed or variable? Did we waste

hours of electricity? Efficiency in the in the factory...Was our production capacity

up or down? Volume. So, that's what we're looking at. Now, notice, here's actual. I'm

always going to start with actual because it's given. Then we're going to compare that

with our flexible budget at actual, our flexible budget at standard and applied is basically

standard...that's what you applied into work in process. Now, when I have 1, 2, 3, 4...when

you have 4 numbers, I'm looking at the differences, 1, 2, 3. Four numbers give you how many differences?

1, 2, 3. Four numbers gives you 3 differences. What is 4 plus 3 everybody? Seven. Spending,

efficiency, volume, spending, efficiency, volume. This is called your spending variance.

The difference between actual and your flexible budget and actual. That's how much you spent.

This is called your efficiency variance. How efficient were you? That's the difference

between your budget at actual and your budget at what got applied. And the last one is called

your volume variance. That is your production volume, the difference between your flexible

budget at standard and what got applied into WIP because you were over- or underapplied,

over- or underapplied. So, what we're looking at is, the difference between spending, efficiency,

volume. Four plus 3 is what? Seven. Think you. Seven. Spending, efficiency, volume.

So, that's a quick overview of where we're going to go. Now, this is actual, so this

is fixed, plus variable, times x. So, for both of these formulas, fixed is the same,

variable is the same. It's the x that changes. X is either actual at actual, or x is standard

allowed for actual. The key is study hard. Don't get discouraged. Woo! Little Michael

Jackson walk. Come on down! I've been teaching almost 20 years after I left Deloitte and

Touche. I've done it for many, many years, helped thousands and thousands of people accomplish

their goal, which is to get through the exam.