ACCT 102 - Chapter 21 Flexible Budgets and standard costs

ACCT 102 - Chapter 21 Flexible Budgets and standard costs -...

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ACCT 102 – Fundamentals of Accounting II Chapter 21 Flexible Budgets and Standard Costs – Schmidt Purpose: In the last chapter we learned about the importance of budgets and how they can provide a financial blueprint. Now we look at the next major topic. In this chapter, we will focus on standard cost information and how it is used in accounting. We will also learn how to prepare flexible budgets and interpret the variances between budgets and actual costs. Flexible Budgeting The Budgetary Control Process – If our budgets were perfect, we wouldn’t need this chapter because there would be no variances. We know, however, that many times the plans that we make aren’t always exactly followed by the expected outcomes. When the results from what we initially planned don’t happen exactly the way we thought, then differences or variances need to be identified and the reasons for them need to be interpreted so that any necessary corrective action can take place. There are four major steps involved in the budgetary control process: 1. Develop the budget based on planned objective (last chapter) 2. Compare actual results to budgeted amounts and analyze the differences 3. Take corrective and strategic actions if necessary 4. Establish new objectives and start the budgeting cycle over with new budgets Fixed Budgets – These are also known as a “static” budgets, because the budget remains at the fixed levels that were used when the budget was created. It does not change, even though the considerations or plans that went into its development might change. Accurate results are tough to interpret with fixed budgets, because a budget that was based on 1,000 pizzas is going to be much different if you actually ended up only making 800 pizzas. Flexible Budgets – These are budgets that “flex” or change with varying levels of activity. Most of the time flexible budgets correspond to actual levels of output. With our example, we would “flex” or adjust our budget to correspond with the actual output of 800 pizzas. This makes
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This note was uploaded on 03/08/2012 for the course ACCT 102 taught by Professor D.schmidt during the Winter '12 term at Cerritos College.

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ACCT 102 - Chapter 21 Flexible Budgets and standard costs -...

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