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Chapter 11

ACC 406 Chapter 11: Chapter 11

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ACC 406
Kevin Palmer

ACC 406 Chapter 11 – Flexible Budgets and Overhead USING BUDGETS FOR PERFORMANCE EVALUATION  Budgets are useful for planning and control, often used as benchmarks for performance evaluation. Static Budgets vs. Flexible Budgets  A performance report compares actual costs with budgeted costs in the following ways: 1. Compare actual costs with the budgeted costs for the budgeted level of activity. 2. Compare actual costs with the actual level of activity.  The first choice requires a report based on static budgets, whereas the second choice needs a report based on flexible budgets.  Static budget is a budget prepared in advance based on a particular level of activity and isn’t adjusted or altered regardless of any changes in actual output, revenues, or costs.  Flexible budget enables a firm to compute the expected costs per unit and then estimate costs for a range of activity levels or production volumes.  The key is knowledge of fixed and variable costs. 2 types of flexible budgets are:  Before-the-fact. Gives the expected outcomes for a range of activity levels or production volumes.  After-the-fact. Based on the actual level of activity achieve in the period. Used to compute what costs should’ve been for the actual level of activity or for the actual production volume.  Budget costs change because total variable costs rise as output increases. Because of this, flexible budgets are sometimes referred to as variable budgets.  Often flexible budget formulas are based on some level of input activity instead of units.  When standard hours are used, we need to convert units into DLH.  Flexible budgets allow management to compute what the costs should be for the level of output that actually occurred.  A performance report, compares actual and budgeted costs for the actual level of nd activity. It’s the 2 type of flexible budget.  The difference between the actual amount and the flexible budget amount is the flexible budget variance.  It provides a measure of the efficiency of a manager.  A static budget provides a measure of whether or not a manager accomplishes his/her goals and represents certain goals that the firm wants to achieve. Flexible Budget Sales Variances  The sales component of a flexible budget will reveal the difference between the level of sales actually achieved and the level of sales indicated by the master budget. VARIABLE OVERHEAD ANALYSIS  OH is divided into fixed and variable categories, which are broken down to 2 variances: ACC 406  Variable OH Variance  Variable OH Spending Variance  Variable OH Efficiency Variance  Fixed OH Variance  Fixed OH Spending Variance  Fixed OH Volume Variance Total Variance OH Variance  It’s the difference between the total actual variance OH and applied variable OH.  Variable OH spending variance measured the aggregate effect of difference between AVOR and SVOR.
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