When to Use a Flexible Budget
A flexible budget is a specific financial plan that provides for the behavior of both fixed and variable costs and the revenues generated with changing production levels. It could be used when a new product enters the market (Lubis et al., 2022). Since it is not easy to determine the demand for the new venture, a flexible budget is preferred to determine the change in revenue with changing output levels.
Standard Costing System and Its Benefits
A standard costing system sets pre-determined values for labor variances, changes in materials, and overhead expenses in a factory. The standard costs provide a comparative basis to determine expenditures within a factory since they relate the current production costs to the pre-determined ones (Lubis et al., 2022). A standard costing system also helps a company reduce costs since it controls production expenses.
Variances Used in Evaluation of Standard Costs
Two types of variances, static and dynamic, determine the relationship between the inputs and the cost of products in standard costing. Static variance provides information between the inputs and standard cost estimates when there is no change in the price or quantity of the inputs (Lubis et al., 2022). On the other hand, dynamic variances give the difference between actual and expected costs if the inputs of production change in quantity.
Differences Between Static and Flexible Budgets
Differences occur between static and flexible budgets, which are popular financial plans. Regarding the volume of units used in making the cost projections, static budgets use the original volume of the sales unit to determine the cost of material, labor, and overhead services required (Lubis et al., 2022). Flexible budgets, on the other hand, use the updated production volume to determine the production cost.
Materials, Labor, and Overhead Variances
Labor variances, costs of materials, and overhead variances are critical strategies used in standard costing. The materials variance strategy provides the disparity between the pre-determined standard expenses and the actual cost incurred on the materials used in production. The direct labor variance provides the difference between a company’s actual and estimated cost of labor activities (Lubis et al., 2022). Overhead variance provides the difference between the actual and expected fixed and variable costs associated with production.
Reference
Lubis, S. S., Maherza, W., Ziwiana, N. D., & Muda, I. (2022). Flexible budget and overhead analysis in pharmacy issuers. Journal of Pharmaceutical Negative Results, 13(8), 2931-2936. Web.