Chapter 10 - Chapter 10 Flexible Budgets and Overhead...

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Chapter 10 Flexible Budgets and Overhead Analysis Suggested Homework: E10-1 thru E10-15
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Static Budgets and Performance Reports 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. Hmm! Comparing static budgets with actual costs is like comparing apples and oranges.
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Flexible Budgets Improve performance evaluation. 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. Let’s look at CheeseCo.
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CheeseCo Static Actual Budget Results Variances Machine hours 10,000 Variable costs Indirect labor 40,000 $ Indirect materials 30,000 Power 5,000 Fixed costs Depreciation 12,000 Insurance 2,000 Total overhead costs 89,000 $ Static Budgets and Performance Reports
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CheeseCo Static Actual Budget Results Variances Machine hours 10,000 8,000 Variable costs Indirect labor 40,000 $ 34,000 $ Indirect materials 30,000 25,500 Power 5,000 3,800 Fixed costs Depreciation 12,000 12,000 Insurance 2,000 2,050 Total overhead costs 89,000 $ 77,350 $ Static Budgets and Performance Reports
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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 U = Unfavorable variance CheeseCo was unable to achieve the budgeted level of activity. CheeseCo Static Budgets and Performance Reports
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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 CheeseCo F = Favorable variance that occurs when actual costs are less than budgeted costs. Static Budgets and Performance Reports
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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 Since cost variances are favorable, have we done a good job controlling costs? CheeseCo Static Budgets and Performance Reports
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The relevant question is . . . “How much of the favorable cost variance is due to lower activity, and how much is due to good cost control?” To answer the question, we must the budget to the actual level of activity. Static Budgets and Performance Reports
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Preparing a Flexible Budget To a budget we need to know that: Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. Fixed Variable
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Cost Total 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 labor 4.00 $ Indirect material 3.00 Power 0.50 Total variable cost 7.50 $ Fixed costs Depreciation 12,000 $ Insurance 2,000 Total fixed cost Total overhead costs Flexible Budgets Preparing a Flexible Budget Fixed costs are expressed as a total amount.
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This note was uploaded on 03/05/2010 for the course ACCT 285 taught by Professor Carver during the Fall '08 term at Iowa State.

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Chapter 10 - Chapter 10 Flexible Budgets and Overhead...

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