Chapter 8 - Flexible budgets, standard costs, and variance analysis. This chapter explores how to prepare flexible budgets and how to compare them to actual results for the purposes of computing revenue and spending variances. It also describes how standards are used to compute material, labor, and overhead variances. | Flexible Budgets, Standard Costs, and Variance Analysis Chapter 08 Chapter 8: Flexible Budgets, Standard Costs, and Variance Analysis This chapter explores how to prepare flexible budgets and how to compare them to actual results for the purposes of computing revenue and spending variances. It also describes how standards are used to compute material, labor, and overhead variances. Variance Analysis Cycle Conduct next period’s operations Identify questions Receive explanations Take corrective actions Analyze variances Prepare standard cost performance report Begin Characteristics of Flexible Budgets Planning budgets are prepared for a single, planned level of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity. Hmm! Comparing static planning budgets with actual costs is like comparing apples and oranges. A planning budget is prepared before the period begins and is valid for only the planned level of activity. If the actual level of activity differs from what was planned, it would be misleading to evaluate performance by comparing actual costs to the static, unchanged planning budget. Improve performance evaluation. May be prepared for any activity level in the relevant range. Show costs that should have been incurred at the actual level of activity, enabling “apples to apples” cost comparisons. Help managers control costs. Let’s look at Larry’s Lawn Service. Characteristics of Flexible Budgets A flexible budget provides estimates of what revenues and costs should be for any level of activity, within a specified range. When used for performance evaluation purposes, actual costs are compared to what the costs should have been for the actual level of activity during the period. This enables “apples to apples” cost comparisons. Larry’s Lawn Service provides lawn care in a planned community where all lawns are approximately the same size. At the end of May, Larry prepared his June budget based on mowing 500 . | Flexible Budgets, Standard Costs, and Variance Analysis Chapter 08 Chapter 8: Flexible Budgets, Standard Costs, and Variance Analysis This chapter explores how to prepare flexible budgets and how to compare them to actual results for the purposes of computing revenue and spending variances. It also describes how standards are used to compute material, labor, and overhead variances. Variance Analysis Cycle Conduct next period’s operations Identify questions Receive explanations Take corrective actions Analyze variances Prepare standard cost performance report Begin Characteristics of Flexible Budgets Planning budgets are prepared for a single, planned level of activity. Performance evaluation is difficult when actual activity differs from the planned level of activity. Hmm! Comparing static planning budgets with actual costs is like comparing apples and oranges. A planning budget is prepared before the period begins and is valid for only the planned level of activity. If the actual .
