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Unformatted text preview: CHAPTER 11 FLEXIBLE BUDGETS AND OVERHEAD ANALYSIS DISCUSSION QUESTIONS 1. A static budget is for a particular level of activity. A flexible budget is one that can be established for any level of activity. 2. For performance reporting, it is necessary to compare the actual costs for the actual level of activity with the budgeted costs for the actual level of activity. A flexible budget provides the means to compute the budgeted costs for the actual level of activ- ity, after the fact. 3. A flexible budget is based on a simple for- mula: Total costs (Y) = F + VX, where F = fixed costs and V = variable cost per unit; this requires knowledge of both fixed and variable components (see Cornerstone 11– 2). 4. A before-the-fact flexible budget allows managers to engage in sensitivity analysis by looking at the financial outcomes pos- sible for a number of different plausible scenarios. 5. An after-the-fact flexible budget facilitates performance evaluation by allowing the cal- culation of what spending should have been for the actual level of activity. 6. An activity-based budget requires three steps: (1) identification of activities, (2) es- timation of activity output demands, and (3) estimation of the costs of resources needed to provide the activity output demanded. 7. Functional-based flexible budgeting relies on unit-based drivers to build cost formulas for various cost items. Activity flexible budget- ing uses activity drivers to build a cost for- mula for the costs of each activity. 8. An activity-based report compares the actu- al costs for the actual level of activity with the budgeted level for the actual level—but it does so for multiple activities and drivers. The increased accuracy results from the us- age of drivers that have a causal relation- ship to predict what the costs should be for the actual level of activity. 9. Part of a variable overhead spending vari- ance can be caused by inefficient use of overhead resources. 10. Agree. This variance, assuming that variable overhead costs increase as labor usage in- creases, is caused by the efficiency or ineffi- ciency of labor usage. 11. The variable overhead efficiency variance values the difference between the actual hours and the hours allowed using the standard variable overhead rate, while the labor efficiency variance values the differ- ence using the standard labor rate. 12. Fixed overhead costs are either committed or discretionary. The committed costs will not differ by their very nature. Discretionary can vary, but the level the company wants to spend on these items is decided at the beginning and usually will be met unless there is a conscious decision to change the predetermined levels....
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- Spring '08
- Accounting, ........., Little Rock, VOH