Chapter 11 - Flexible Budgets and Overhead Analysis

Chapter 11 - Flexible Budgets and Overhead Analysis -...

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Chapter 11: Flexible Budgets and Overhead Analysis - Static Budgets and Performance Reports o Static budgets are prepared for a single, planned level of activity o Performance evaluation is difficult when actual activity differs from the planned level of activity o “Comparing static budgets with actual costs is like comparing apples and oranges” o Example: - U = Unfavorable variance (CheeseCo was unable to achieve the budgeted level of activitiy) - F = Favorable variance (Occurs when actual costs are less than budgeted costs) o Since cost variances are favorable, have we done a good job controlling costs? You can’t answer that question using a static budget. Actual activity is below budgeted activity Shouldn’t variable costs be lower if actual activity is lower? o Relevant Question: “How much of the favorable cost variance is due to lower activity, and how much is due to good cost control?”
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Must FLEX the budget to the actual level of activity - Flexible Budgets o Background May be prepared for any activity level in the relevant range Show costs that should have been incurred at the actual level of activity enabling “apples to apples” cost comparisons Reveal variances related to cost control Improve performance evaluation o Preparing a flexible budget You must first flex the budget to the actual level of activity To flex a budget we need to know that: TVC change in direct proportion to changes in activity TFC remain unchanged within the relevant range - Variable costs are expressed as a constant amount per hour: $40,000/10,000 hours = $4.00 per hour.
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This note was uploaded on 03/17/2009 for the course ACCT 222 taught by Professor Wainberg during the Spring '08 term at UMass (Amherst).

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Chapter 11 - Flexible Budgets and Overhead Analysis -...

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