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Chapter 11

ACC406 Chapter 11.doc

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ACC 406
Donna Zathy

ACC406 - Chapter 11 • Using Budgets for Performance Evaluation o Static Budgets vs. Flexible Budgets  Performance Report = Compares actual costs with budgeted costs • Two possibilities exist for making this comparison o 1) Comparison of actual costs with the budgeted costs for the budgeted level of activity  Report based on Static Budgets o 2) Comparison of actual costs with the actual level of activity  Report based on Flexible Budgets  Static Budget = Budget for a particular level of activity • Master budgets generally created for a particular level of activity • One way to prepare performance reports is to compare the actual costs with the budgeted costs from the master budget  Flexible Budget = Enables a firm to compute expected costs for a range of activity levels • Two types of Flexible Budgets o 1) Before-The-Fact  Helps managers deal with uncertainty by allowing them to see the expected outcomes for a range of activity levels  Used to generate financial results for a number of plausible scenarios o 2) After-The-Fact  Used to compute what costs should have been for the actual level of activity  Then compared with the actual costs in order to assess performance • Sometimes referred to as Variable Budgets • Powerful control tool because they allow management to compute what the costs should be for the LEVEL OF OUTPUT THAT ACTUALLY OCCURED • Flexible Budget Variance = Difference between the actual amount and the flexible budget amount • Variable Overhead Analysis o Overhead is divided into fixed and variable categories  Two variances calculated for each category o Total Variable Overhead Variance  Difference between the total ACTUAL VARIABLE OVERHEAD and APLLIED VARIABLE OVERHEAD  Variable Overhead is applied by using hours allowed in a standard cost system  Can be divided into spending and efficiency variances  Variable Overhead Spending Variance • Measures the aggregate effect of differences between the actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR) o AVOR = Actual Variable Overhead / Actual Hours • Variable Overhead Spending Variance = (AVOR x AH) - (SVOR x AH) o = (AVOR - SVOR) x AH  Variable Overhead Efficiency Variance • Varies as the production volume changes • Mea
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