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Understanding Flexible Budgets and Standard Costs: Performance Variance Analysis

This chapter explores the concept of flexible budgets and standard costs, focusing on their applications in performance variance analysis. It covers the calculation of variances, including materials cost variances and labor variances, as well as overhead cost variances. Key formulas for computing price and efficiency variances are presented, alongside a detailed explanation of the predetermined overhead rate (POHR). This comprehensive overview equips management with the tools to analyze actual performance against standards, enhancing financial decision-making in production and service delivery.

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Understanding Flexible Budgets and Standard Costs: Performance Variance Analysis

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  1. Chapter 24 Flexible Budgets and Standard Costs

  2. Pacific CompanyDemonstration Problem Data

  3. Pacific CompanyDemonstration Problem Data

  4. Flexible Budget

  5. Flexible BudgetPerformance Report

  6. Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Price Variance Quantity Variance Computing Variances AQ(AP - SP) SP(AQ - SQ) AQ= Actual QuantitySP= Standard PriceAP= Actual PriceSQ= Standard Quantity

  7. Materials Cost Variances

  8. Labor Variances ActualHours ActualHoursStandardHours× × ×ActualRate StandardRateStandardRate Rate Variance Efficiency Variance AH(AR - SR) SR(AH - SH) AH= Actual Hours SR= Standard RateAR = Actual Rate SH = Standard Hours Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance

  9. Labor Cost Variances

  10. Overhead Standards and Variances Recall that overhead costs are assigned to products and services using a predetermined overhead rate (POHR): Assigned Overhead = POHR × Standard Activity Estimated total overhead costsEstimated activity POHR =

  11. Computing Overhead Variances Actual Flexible Budget Applied Variable for Variable Variable Overhead Overhead at Overhead at Incurred Actual Hours Standard Hours AH × AVR AH × SVR SH × SVR Spending Variance EfficiencyVariance AH = Actual Hours of ActivityAVR = Actual Variable Overhead RateSVR = Standard Variable Overhead RateSH = Standard Hours Allowed

  12. Variable Overhead Cost Variances

  13. ControllableVariance Overhead Variance Analysis TotalOverheadVariance VariableOverhead FixedOverhead SpendingVariance EfficiencyVariance SpendingVariance VolumeVariance

  14. Spending Variance Volume Variance Fixed Overhead Variances Results from paying moreor less than expected forfixed overhead items. Results from the inabilityto operate at the activityplanned for the period. Has no significance for cost control.

  15. Fixed Overhead Cost Variances

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