Flexible 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
Dimitrov
Read MoreJob-Order Costing System Essentials
Key Concepts of Job-Order Costing Systems
Here’s a corrected and improved version of the provided text, focusing on clarity and accuracy:
- The use of a predetermined overhead rate in a job-order cost system makes it possible to compute the total cost of a job before. FALSE
- The formula for computing the predetermined overhead rate is: Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base. TRUE
- When the predetermined overhead rate is