Understanding Fixed Overhead Costs and Costing Methods
What is a Budgeted Rate of Fixed Overhead Costs?
The budgeted fixed overhead cost rate is calculated by dividing the budgeted fixed overhead costs by the denominator level of the cost allocation base.
Interpreting Production Volume Variance
Managers should interpret the production volume variance cautiously. It measures the economic cost of unused capacity. This variance doesn’t account for any reduction in the selling price needed to stimulate greater demand to utilize idle capacity.
Reconciling Actual
Read MoreFlexible Budgets, Standard Costs, and Variance Analysis
Chapter 7: Flexible Budgets vs. Static Budgets
A static budget is based on a planned production level at the beginning of the budget period. A flexible budget is adjusted to recognize the level of actual output for the budget period. Flexible budgets provide a more accurate perception of the causes of variations than static budgets.
Developing a Flexible Budget
Managers can use a three-step procedure to develop a flexible budget. When all costs are variable or fixed, these three steps require only
Read MoreBudgeting Methods: Advantages and Disadvantages
Bottom-Up Budgeting
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Standard Costing: Advantages, Types, and Implementation
Standard Cost Definition
Standard cost is the expected cost under specific assumptions about internal and external factors. It’s an estimate of controlled and uncontrolled parameters, incorporating a management objective.
Advantages of Standard Costs vs. Historical Costs
Standard cost systems offer several advantages:
- Provide a management reference tool.
- Enable control by exception through deviation analysis.
- Facilitate a priori stock assessment.
- Aid in pricing and policy formulation.
- Require clear responsibility
Understanding Operating Profit, Capacity, and Inventory Costing
Obtaining accurate data on operating profits is vital to sustaining and building a business organization. Operating profit figures inform decision-makers about the resources they can use to achieve their organization’s objectives. In business, capacity is generally understood to mean a ‘constraint’ and the ‘upper limit’ at which a company can operate. But this refers to the capacity level required to generate an acceptable profit margin. It does not mean that capacity is limited to a particular
Read MoreFinancial Planning: Sales, Costs, and Budgeting
Walsh Company Production
Walsh Company expects sales of Product W to be 60,000 units in April, 75,000 units in May, and 70,000 units in June. D Company desires that the inventory on hand at the end of each month be equal to 40% of the next month’s expected unit sales. Due to excessive production during March, on March 31 there were 25,000 units of Product W in the ending inventory. Given this information, Walsh Company’s production of Product W for the month of April should be: 65,000 units