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Lecture Managerial accounting: Creating value in a dynamic business environment (10/e): Chapter 11 - Ronald W. Hilton, David E. Platt

After completing this chapter, you should be able to: Distinguish between static and flexible budgets and explain the advantages of a flexible overhead budget; prepare a flexible overhead budget, using both a formula and a columnar format; explain how overhead is applied to Work-in-Process Inventory under standard costing. | Flexible Budgeting and Analysis of Overhead Costs Chapter 11 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 11: Flexible Budgeting and Analysis of Overhead Costs Flexible Budgets Static budgets are prepared for a single, planned level of activity. Performance evaluation for overhead is difficult when actual activity differs from the planned level of activity. Hmm! Comparing static budgets with actual costs is like comparing apples and oranges. 11- Static budgets are prepared for a single, planned level of activity. Performance evaluation for overhead is difficult when actual activity differs from the planned level of activity. Since direct material and direct labor are traceable to products, it is straightforward to determine standard costs for these inputs. But to compare overhead costs at the budgeted level of activity to actual overhead costs at some other level of | Flexible Budgeting and Analysis of Overhead Costs Chapter 11 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 11: Flexible Budgeting and Analysis of Overhead Costs Flexible Budgets Static budgets are prepared for a single, planned level of activity. Performance evaluation for overhead is difficult when actual activity differs from the planned level of activity. Hmm! Comparing static budgets with actual costs is like comparing apples and oranges. 11- Static budgets are prepared for a single, planned level of activity. Performance evaluation for overhead is difficult when actual activity differs from the planned level of activity. Since direct material and direct labor are traceable to products, it is straightforward to determine standard costs for these inputs. But to compare overhead costs at the budgeted level of activity to actual overhead costs at some other level of activity, is like comparing apples and oranges. (LO1) Advantages of Flexible Budgets Improve performance evaluation. May be prepared for any activity level in the relevant range. Show revenues and expenses that should have occurred at the actual level of activity. Reveal variances due to good cost control or lack of cost control. 11- There are several advantages of flexible budgets. Revenues and expenses are what they should have been at the actual level of activity. Flexible budgets can be prepared for any level of activity within the relevant range. These budgets make it possible to distinguish if variances are caused by good cost control or lack of cost control. The variances can be analyzed to help improve performance evaluation. (LO1) Preparing a Flexible Budget 11- The Cheese Company uses machine hours as the activity units. The flexible budget is prepared at three levels of activity: 8,000 hours, 10,000 hours, and 12,000 hours, which are all within the relevant range. .