Flexible Budgets and Standard costs. Chapter 23. Budgetary Control and Reporting. Develop the budget from planned objectives. Compare actual with budget and analyze any differences. Revise objectives and prepare a new budget. Management uses budgets to monitor and control operations.
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Management usesbudgets to monitorand controloperations.
Show revenues and expensesthat should have occurred at theactual level of activity.
May be prepared for any activity level in the relevant range.
Reveal variances due to good cost
control or lack of cost control.
Improve performance evaluation.
Total variable costschangein direct proportion to changes in activity.
Total fixedcosts remainunchanged within therelevant range.
FixedPreparation of Flexible Budgets
Practical standards should be set at levels that are currently attainable with reasonable and efficient effort.
Ideal standards, that are based on perfection, areunattainable and discouraging to most employees.
A standard cost card might look like this:
Quantity VarianceCost Variance Computation
Standard quantity is the quantity thatshould have been usedfor the actual good output.
Standard price is the amount that should have been paidfor the resources acquired.
ActualHours ActualHoursStandardHours× × × ActualRate StandardRate StandardRate
AH(AR - SR) SR(AH - SH)
AH= Actual HoursSR= 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
Using highly paid skilled workers toperform unskilled tasks results in anunfavorable rate variance.
High skill,high rate
Low skill,low rate
Production managers who make work assignmentsare generally responsible for rate 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
Contains a fixedoverhead rate whichdeclines as activitylevel increases.
Contains a variableunit rate which staysconstant at all levelsof activity.
Function of activity levelchosen to determine rate.
Flexible budgets, showing budgeted amount of overhead for various levels of activity, are used to analyze overhead costs.
Total OverheadVariance (OCV)