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Chapter 11

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Department
Accounting
Course
ACC 406
Professor
Anthony Chan
Semester
Fall

Description
CHAPTER 11 – FLEXIBLE BUDGETS AND OVERHEAD ANALYSIS 1. Prepare a flexible budget, and use it for performance reporting  Static budgets provide expected cost for a given level of activity. If the actual level of activity differs from the level associated with the static budget level, then comparing actual costs with budgeted costs does not make any sense. The solution is flexible budgeting  Flexible budgets divide costs into those that vary with units of production (or direct labour hours) and those that are fixed with respect to these unit level drivers. These relationships allow the identification of a cost formula for each item in the budget 2. Calculate the variable overhead variances, and explain their meaning  Overhead costs are often a significant proportion of costs in a budget  Comparing actual variable and fixed overhead costs with applied overhead costs yields a total overhead variance  In a standard cost system, it is possible to break down these overhead variances into component variances  For variable overhead, the 2 component variances are the spending variance and the efficiency variance  The spending variance is the result of comparing the actual costs with budgeted costs  The variable overhead efficiency variance is the result of
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