MGMT 201: Chapter 11 Notes
MGMT 201: Chapter 11 Notes MGMT 201
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This 2 page Class Notes was uploaded by Zach Weinkauf on Saturday April 9, 2016. The Class Notes belongs to MGMT 201 at Purdue University taught by David Scott in Spring 2016. Since its upload, it has received 21 views. For similar materials see Managerial accounting in Business, management at Purdue University.
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Date Created: 04/09/16
Chapter 11: Flexible Budgeting and Analysis of Overhead Costs We use flexible budgets because static budgets don’t give enough information. Flexible Budgets Central Concept o If you can tell me what your activity was for the period, I will tell you what your costs and revenue should have been. Advantages: o Show revenues and expenses that should have occurred at the actual level of activity. o May be prepared for any activity level in the relevant range. o Reveal variances due to good cost control or lack of. o Improve performance evaluation. There is no flex in the fixed costs, variable costs have a standard cost and changes by amount of hours. (Budgeted variable overhead cost per unit * Total Activity Units) + Budgeted fixed overhead cost Total Budgeted Overhead Cost Flexible budget is prepared for the same activity level as actually achieved. Spending Variance – results from paying more or less than expected for overhead items and from excessive usage of overhead items. Efficiency Variance – a function of the selected cost driver – does not reflect overhead control. Budget Variance – results from paying more or less than expected for fixed overhead items. Formulas: Variable Overhead Variances: AH = Actual Hours of Activity AR = Actual Variable Overhead Rate SVR = Standard Variable Overhead Rate SH = Standard Hours Allowed 1. Actual Variable Overhead Incurred = AH * AR 2. Flexible Budget for Variable Overhead at Actual Hours = AH * SVR 3. Flexible Budget for Variable Overhead at Standard Hours = SH * SVR 4. Spending Variance = #1 above - #2 above = AH*(AR – SVR) 5. Efficiency Variance = #2 above - #3 above = SVR*(AH-SH) Fixed Overhead Variances: PFOHR = Predetermined Fixed Overhead Rate SH = Standard Hours Allowed 1. PFOHR = Budgeted Fixed Overhead / Planned Activity in Hours 2. Fixed Overhead Applied = SH * PFOHR 3. Budget Variance = Actual Fixed Overhead Incurred – Fixed Overhead Budget 4. Volume Variance = Fixed Overhead Budget – Fixed Overhead Applied (SH * PFOHR)
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