Flexible Budgets and Overhead Analysis, Part 1 | California State University, Northridge - Edubirdie

University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

196

Pages:

11
Author:

Dante Waller

Chapter 9 Flexible Budgets and Overhead Analysis Part 1 Learning Objective LO1 To prepare a flexible budget and explain the advantages of the flexible budget approach over the static budget approach Static Budgets and Performance Reports Static budgets are prepared for a single, planned level of activity. Hmm! Comparing static budgets with actual costs is like comparing apples and oranges. Performance evaluation is difficult when actual activity differs from the planned level of activity. Flexible Budgets May be prepared for any activity level within the relevant range. Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons. Reveal variances related to cost control. Improve performance evaluation. Let’s look at a Specific Example. Static Budgets and Performance Reports CheeseCo Static Budgets and Performance Reports CheeseCo Static Budgets and Performance Reports CheeseCo U = Unfavorable variance CheeseCo was unable to achieve the budgeted level of activity. Static Budgets and Performance Reports CheeseCo F = Favorable variance that occurs when actual costs are less than budgeted costs. Static Budgets and Performance Reports CheeseCo Since cost variances are favorable, have we done a good job controlling costs? Static Budgets and Performance Reports I don’t think I can answer the question using a static budget. Actual activity is below budgeted activity. So, shouldn’t variable costs be lower if actual activity is lower? Static Budgets and Performance Reports The relevant question is . . . “How much of the favorable cost variance is due to lower activity, and how much is due to good cost control?” To answer the question, we must the budget to the actual level of activity.

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