Kế toán, kiểm toán - Chapter 11: Flexible budgeting and the management of overhead and support activity costs

Chapter 11Flexible Budgeting and the Management of Overhead and Support Activity CostsFlexible BudgetsHmm! Comparingstatic budgetswith actual costsis like comparingapples and oranges. 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.Flexible Budgets Central Concept If you can tell me what your activity wasfor the period, I will tell you what your costs and revenue should have been.Advantages of Flexible BudgetsImprove performance evaluation.May be prepared for any activity level in the relevant range.Show revenues and expensesthat should have occurred at theactual level of activity. Reveal variances due to good costcontrol or lack of cost control.Preparing a Flexible BudgetNote: There is no flexin the fixed costs.Preparing a Flexible BudgetBudgeted variable Total overhead cost per activity  activity unit units ×+Budgeted fixedoverhead costTotal budgetedoverhead cost=Flexible BudgetPerformance Report. Overhead Application in a Standard Costing SystemOverhead Application in a Standard Costing SystemChoice of Activity Measure Variable overhead and the activity measure should vary in a similar pattern. Identify variable overhead cost drivers. Examples: machine hours, labor hours, process time. Dollar measures should be avoided as they are subject to price-level changes.Spending VarianceEfficiencyVariance AH × SVR AH × AR SH × SVR Actual Flexible Budget Flexible Budget Variable for Variable for Variable Overhead Overhead at Overhead at  Incurred Actual Hours Standard Hours Variable Overhead VariancesSpending variance = AH(AR - SVR)Efficiency variance = SVR(AH - SH)Variable Overhead Variances – A Closer LookSpending VarianceEfficiency VarianceResults from paying moreor less than expected foroverhead items and from excessive usage ofoverhead items.A function of the selected cost driver.It does not reflectoverhead control. Budget VarianceVolumeVariance PFOHR = Predetermined Fixed Overhead Rate SH = Standard Hours Allowed SH × PFOHR  Actual Fixed Fixed Fixed Overhead Overhead Overhead  Incurred Budget Applied Fixed Overhead VariancesPFOHR =Applied Fixed Overhead = PFOHR × Standard HoursBudgeted Fixed OverheadPlanned Activity in Hours Recall that fixed overhead costs are applied to products and services using a predetermined fixed overhead rate (PFOHR):Fixed OverheadOverhead Cost Performance Report