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Chapter 11

Chapter 11. Flexible Budgeting and the Management of Overhead and Support Activity Costs. Compare & Contrast Flexible & Static Budgets. Flexible Budget is Used by Most Companies to Help Control Overhead Costs. Flexible Budget Covers a Range of Activity.

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Chapter 11

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  1. Chapter 11 Flexible Budgeting and the Management of Overhead and Support Activity Costs

  2. Compare & Contrast Flexible & Static Budgets Flexible Budget is Used by Most Companies to Help Control Overhead Costs. Flexible Budget Covers a Range of Activity. Flexible Budget Valid in the Firm’s Relevant Range. Static Budget is based upon specific level of planned activity.

  3. List & Discuss Advantages of a Flexible Budget Actual Costs Compared to a Budget Based Upon the Actual Activity that Caused those Costs. Uses More Relevant Information. Eliminates Volume Variances.

  4. Discuss Input Versus Output • Single Product, Not an Issue • Different Products = Different Requirements • Different Requirements = Different Resources Used • Different Resources Used = Different Costs Generated

  5. Total Budgeted Monthly Overhead Cost = Budgeted Variable Overhead Cost per Activity Unit Total Activity Units Budgeted Fixed Overhead Cost per Month X + What is the Formula for a Flexible Budget?

  6. Manufacturing Overhead Work-in-Process Inventory Actual Overhead Applied Overhead Actual Hours X Predetermined Overhead Rate Actual Overhead Applied Overhead Standard HoursAllowed X Predetermined (or Standard) Rate Work-in-Process Inventory Review Difference Between Normal & Standard Costing NORMAL Applied Overhead Actual Hours X Predetermined Overhead Rate STANDARD Manufacturing Overhead Applied Overhead Standard HoursAllowed X Predetermined (or Standard) Rate

  7. Discuss Important Issues in Choosing an Activity Driver • Activity Measure Should Vary in a Similar Pattern to the Variation in Overhead Costs • Computer-Integrated Manufacturing • Cost Driver • Dollar Measures

  8. How are Variable Overhead Cost Variances Used? • At the End of Period • Determine the Level of Overhead Costs that Should Have Been Used to Obtain the Actual Output Obtained • Compare To the Actual Overhead Costs • Breakdown in Four Separate Variances

  9. Standard Notation for Variance Formulas Where: AH = Actual Hours Used AVR = Actual Variable Rate SVR = Standard Variable Rate SH = Standard Hours

  10. (AH X AVR) - (AH X SVR) - (SH X SVR) - (SH X SVR) AH(AVR-SVR SVR(AH-SH) Spending Efficiency What are the Formulas for the Direct-Labor Variances? Actual Variable Overhead Flexible Budget Variable Overhead Variable Overhead Applied to Work-in-Process

  11. Discuss Interpreting Variable Overhead Variances • Efficiency • Reveals Usage Resource, More or Less than the Budget • Spending • Reveals Cost of Resource More or Less Than Expected • The Real Control Variance

  12. Fixed Overhead Applied to Work-in-Process Actual Fixed Overhead Budgeted Fixed Overhead Standard Standard Allowed Fixed Process X Overhead Hours Rate Fixed Overhead Budget Fixed Overhead Volume What is the Formula for Fixed Overhead Variances?

  13. Define an Overhead Cost Performance Report Shows the Actual and Flexbile-Budget Cost Levels for Each Overhead Item with Variable Overhead Spending and Efficiency and Fixed Overhead Budget Variances

  14. Cost Performance Report Comment on the Cost Performance Report • 3 Columns of Information • One Each for Actual Costs, Budgeted Costs, Variances • Spending & Efficiency Variances Only Apply to Variable Cost Items • Budget Variance is Only Shown for Fixed Cost Items

  15. Define an Activity-Based Flexible Budget It is based on several cost drivers rather than on a single volume-based cost driver

  16. Discuss Activity-Based Flexible Budgeting Use Multiple Cost Drivers Different Drivers Used to Budget Different Cost Pools More Accurate to Compare Actual Costs to Provides a Richer View of Cost Behavior

  17. Chapter 11 Finished!!!

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