Chapter 9

Chapter 9 - Chapter Nine: Flexible Budgets and Overhead...

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Chapter Nine: Flexible Budgets and Overhead Analysis Characteristics of a Flexible Budget Static Budget – prepared at the beginning of the budgeting period and is valid for only the planned level of activity. Appropriate for planning but is unsuitable for evaluating how well costs are controlled. Flexible Budget – take into account how changes in activity affect costs. Makes it east to estimate what costs should be for any level of activity within a specified range. Actual costs are compared to what the costs should have been for the actual level of activity during the period. How a Flexible Budget Works Shows how overhead costs are expected to changed depending on the monthly level of activity. Using the Flexible Budgeting Concept in Performance Evaluation Prepared by multiplying the actual level of activity by the cost formula for each of the variable cost categories. A cost is variable if it is proportional to activity. It is fixed if it does not depend on the level of activity. The Measure of Activity—A Critical Choice Variable overhead costs should be related to the activity base on a cause and effect basis. o Changes in the activity base should cause or at least be highly correlated with changes in the variable overhead costs in the flexible budget. Activity base should not be expressed in dollars or any other currency.
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This note was uploaded on 04/18/2008 for the course ACCT 202 taught by Professor Steedle during the Spring '07 term at Towson.

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Chapter 9 - Chapter Nine: Flexible Budgets and Overhead...

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