This chapter expands the study of overhead variances that was started in Chapter 10. It also explains how flexible budgets can be used to control variable and fixed overhead costs.
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity.
Learning Objective 1
Prepare a flexible budget and explain the advantages of the flexible budget approach over the static budget approach.
Static Budgets and Performance Reports:
A static budget is prepared at the beginning of the budgeting period and is valid for only the planned level of activity. It is suitable for planning, but it is inadequate for evaluating how well costs are controlled because the actual level of activity is unlikely to equal the planned level of activity, thus resulting in “apples-to-oranges” cost comparisons.