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Lecture Fundamental accounting principles (20/e): Chapter 24 - Wild, Shaw, Chiappetta

Chapter 24 - Flexible budgets and standard costs. After completing this chapter you should be able to: Define standard costs and explain how standard cost information is useful for management by exception, describe variances and what they reveal about performance, analyze changes in sales from expected amounts, prepare a flexible budget and interpret a flexible budget performance report. | Chapter 24 FLEXIBLE BUDGETS AND STANDARD COSTS Chapter 24: Flexible Budgets and Standard Costs Management uses budgets to monitor and control operations. Develop the budget from planned objectives. Compare actual with budget and analyze any differences. Take corrective and strategic actions. Revise objectives and prepare a new budget. BUDGETARY CONTROL AND REPORTING Budgets are an important cost control tool. Actual results are compared with budgets and differences are investigated and analyzed. This process may result in corrective action to restore progress toward budgeted objectives. If the operating environment has changed the investigation and analysis may lead to budget revisions. 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. PURPOSE OF FLEXIBLE BUDGETS A flexible budget shows us the revenue and expenses that should have been incurred at the actual level of activity, rather than just the budgeted level of activity. One of the real strengths of flexible budgeting is that it helps us get a firm grasp on cost control. In addition, performance evaluation is improved using flexible budgeting. The central concept behind flexible budgeting is that if you can tell me what your activity was during the period, I can tell you what your revenue and expenses should have been at that level of activity. PREPARATION OF FLEXIBLE BUDGETS To a budget for different activity levels, we must know how costs behave with changes in activity levels. Total variable costs change in direct proportion to changes in activity. Total fixed costs remain unchanged within the relevant range. Fixed Variable P 1 In order to prepare an effective flexible budget, we have to know that total variable costs change directly and proportionately with the level of activity, and that total fixed costs . | Chapter 24 FLEXIBLE BUDGETS AND STANDARD COSTS Chapter 24: Flexible Budgets and Standard Costs Management uses budgets to monitor and control operations. Develop the budget from planned objectives. Compare actual with budget and analyze any differences. Take corrective and strategic actions. Revise objectives and prepare a new budget. BUDGETARY CONTROL AND REPORTING Budgets are an important cost control tool. Actual results are compared with budgets and differences are investigated and analyzed. This process may result in corrective action to restore progress toward budgeted objectives. If the operating environment has changed the investigation and analysis may lead to budget revisions. 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. PURPOSE OF FLEXIBLE BUDGETS A flexible budget shows us