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Lecture Fundamental accounting principles (21e) - Chapter 23: Flexible budgets and standard costs

After completing this chapter you should be able to: Describe the importance and benefits of budgeting and the process of budget administration, describe a master budget and the process of preparing it, analyze expense planning using activity-based budgeting, prepare each component of a master budget and link each to the budgeting process. | Chapter 23 Flexible Budgets and Standard costs Chapter 23: Flexible Budgets and Standard Costs Management uses budgets to monitor and control operations. Develop the budget from planned objectives. Compare actual with budget and analyze any differences. Take corrective and strategic actions. Revise objectives and prepare a new budget. Budgetary Control and Reporting Budgets are an important cost control tool. Actual results are compared with budgets and differences are investigated and analyzed. This process may result in corrective action to restore progress toward budgeted objectives. If the operating environment has changed the investigation and analysis may lead to budget revisions. U = Unfavorable variance Actual cost is greater than budgeted cost. F = Favorable variance Actual revenue and income are greater than budgeted revenue and income. If unit sales are higher, should we expect costs to be higher? How much of the higher costs are because of higher unit sales? Fixed Budget Performance Report Optel’s fixed budget was prepared for January at an expected sales level of 10,000 units. However, Optel actually sold 12,000 units during the month. All of the expense variances are unfavorable because actual expenses are greater than budgeted expenses. As a result of the increase in sales from 10,000 units to 12,000 units, variances for sales and income are favorable. Since the cost variances are unfavorable, has Optel done a poor job controlling costs? But wait, if sales volume is greater than expected, shouldn’t we expect Optel’s costs to be higher? If so, what portion of the higher costs is due to activity and what portion is due to poor cost control? The question is really difficult to answer using a fixed budget. The sales level was higher than the budgeted level, so it follows that variable expenses should be higher to support the higher level of sales. We actually don’t have a grip on cost control. One of the ways we can answer the question about the . | Chapter 23 Flexible Budgets and Standard costs Chapter 23: Flexible Budgets and Standard Costs Management uses budgets to monitor and control operations. Develop the budget from planned objectives. Compare actual with budget and analyze any differences. Take corrective and strategic actions. Revise objectives and prepare a new budget. Budgetary Control and Reporting Budgets are an important cost control tool. Actual results are compared with budgets and differences are investigated and analyzed. This process may result in corrective action to restore progress toward budgeted objectives. If the operating environment has changed the investigation and analysis may lead to budget revisions. U = Unfavorable variance Actual cost is greater than budgeted cost. F = Favorable variance Actual revenue and income are greater than budgeted revenue and income. If unit sales are higher, should we expect costs to be higher? How much of the higher costs are because of higher unit sales? Fixed .