ch11 - Managerial Accounting Chapter 11 Flexible Budgets...

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Managerial Accounting Chapter 11 Flexible Budgets and Overhead
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Highlights How is a flexible budget prepared? What are its benefits? How do we use flexible budgets to prepare an overhead analysis and variance reports including spending and efficiency variances? What are the overhead application effect of standard costs? How do we compute overhead variances both variable and fixed components?
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   Static budgets are prepared for a single,  planned level   of activity.    Performance evaluation is difficult when actual  activity differs from the planned level of activity. Static Budgets
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Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs Indirect labor 40,000 $ 34,000 $ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Depreciation 12,000 12,000 0 Insurance 2,000 2,050 50 U Total overhead costs 89,000 $ 77,350 $ $11,650 F Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs Indirect labour 40,000 $ 34,000 $ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Amortization 12,000 12,000 0 Insurance 2,000 2,050 50 U Total overhead costs 89,000 $ 77,350 $ $11,650 F Static Budgets and Performance Reports U = Unfavourable variance CheeseCo was unable to achieve the budgeted level of activity. CheeseCo
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Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs Indirect labor 40,000 $ 34,000 $ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Depreciation 12,000 12,000 Insurance 2,000 2,050 U Total overhead costs 89,000 $ 77,350 $ $11,650 F Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs Indirect labour 40,000 $ 34,000 $ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Amortization 12,000 12,000 Insurance 2,000 2,050 U Total overhead costs 89,000 $ 77,350 $ $11,650 F Static Budgets and Performance Reports F = Favourable variance that occurs when actual costs are less than budgeted costs. CheeseCo
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Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs Indirect labor 40,000 $ 34,000 $ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Depreciation 12,000 12,000 Insurance 2,000 2,050 U Total overhead costs 89,000 $ 77,350 $ $11,650 F Static Actual Budget Results Variances Machine hours 10,000 8,000 2,000 U Variable costs Indirect labour 40,000 $ 34,000 $ $6,000 F Indirect materials 30,000 25,500 4,500 F Power 5,000 3,800 1,200 F Fixed costs Amortization 12,000 12,000 Insurance 2,000 2,050 U Total overhead costs 89,000 $ 77,350 $ $11,650 F Static Budgets and Performance Reports Since cost variances are favourable, have we done a good job controlling costs? CheeseCo
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Static Budgets and Performance Reports I don’t think I can answer the question using a static budget. Actual activity is below budgeted activity which is unfavourable. So, shouldn’t variable costs be lower if actual activity is lower?
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Flexible Budget Differs from static budgets geared towards a variety of activity levels within the relevant range can be tailored to any level of activity within that range
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Flexible Budget Example Cost Total Flexible Budgets Formula Fixed 8,000 10,000 12,000 Per Hour Cost Hours Hours Hours Machine hours 8,000 10,000 12,000 Variable costs Indirect labour 4.00 32,000 $ 40,000
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ch11 - Managerial Accounting Chapter 11 Flexible Budgets...

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