Flexible Budgets with Multiple Cost Drivers
LEARNING OBJECTIVE 5
Prepare a flexible budget with more than one cost driver.
At Rick’s Hairstyling, we have thus far assumed that there is only one cost driver—the number of client-visits. However, in the activity-based costing chapter, we found that more than one cost driver might be needed to adequately explain all of the costs in an organization. For example, some of the costs at Rick’s Hairstyling probably depend more on the number of hours that the salon is open for business than the number of client-visits. Specifically, most of Rick’s employees are paid salaries, but some are paid on an hourly basis. None of the employees is paid on the basis of the number of customers actually served. Consequently, the cost formula for wages and salaries would be more accurate if it were stated in terms of the hours of operation rather than the number of client-visits. The cost of electricity is even more complex. Some of the cost is fixed—the heat must be kept at some minimum level even at night when the salon is closed. Some of the cost depends on the number of client-visits—the power consumed by hair dryers depends on the number of customers served. Some of the cost depends on the number of hours the salon is open—the costs of lighting the salon and heating it to a comfortable temperature. Consequently, the cost formula for electricity would be more accurate if it were stated in terms of both the number of client-visits and the hours of operation rather than just on the number of client-visits.
Exhibit 9–8 shows a flexible budget in which these changes have been made. In that flexible budget, two cost drivers are listed—client-visits and hours of operation—where q1 refers to client-visits andq2 refers to hours of operation. For example, wages and salaries depend on the hours of operation and its cost formula is Because the salon actually operated 185 hours, the flexible budget amount for wages and salaries is $105,700 (= $65,000 + $220 × 185). The electricity cost depends on both client-visits and the hours of operation and its cost formula is Because the actual number of client-visits was 1,100 and the salon actually operated for 185 hours, the flexible budget amount for electricity is $1,610 (= $390 + $0.10 × 1,100 + $6.00 × 185).