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  • 1.  Difference between Flexible, Static and Applied budget

    Posted 05-27-2013 01:08 PM

    Dear all, hope I can get a clear answer for the below.

    I need help to understand the difference between Flexible, Static and Applied budgets and costs. I am actually studying for CMA Exam Part 1 and I'm a little confused between the usage of those for Variance calculations. When are Applied costs relevant in the calculations?

    Thanks for your help,

    Chadi



  • 2.  RE:Difference between Flexible, Static and Applied budget

    Posted 05-29-2013 06:39 AM

    Static budget is prepared for only one level of production volume, and also called as master budget.

    Flexible budget is a summarized budget that can easily be computed for several different production volume levels, which separate variable costs from fixed costs.

    Below are links containing a lot of information which would be useful for you to grasp the concepts of and the relationship between flexible and static budget.

    http://www.ehow.com/info_7784641_static-budget-vs-flexible-budget.html

    http://www.accountingtools.com/questions-and-answers/what-is-a-static-budget.html

    http://www.accountingtools.com/questions-and-answers/what-is-a-flexible-budget.html

    http://www.investopedia.com/articles/07/budgetingforcompanies.asp

    Materials in respect of variances presented in IMA learning system can give you a good grasp about this topic. Before going into the study of variance topic, you must clearly tackle above two types of budget, their concepts and applications etc. since there are lot of variances in relation to flexible budget, and static budget as well, which are applicable to labor, materials, MOH and Fixed OH and so on.


    On the other hand, I don't have any idea about "Applied cost", which seems not to be a technical term used in MA.  Where did you come across this term?


    This answer may not be quite up to your expectation! Sorry!


    -------------------------------------------
    Kam Sing LEUNG CFP, CPA, FCCA
    Controller
    Total Solution Consultancy (Hangzhou) Limited
    Hangzhou
    China
    -------------------------------------------








  • 3.  RE:Difference between Flexible, Static and Applied budget

    Posted 05-29-2013 06:50 AM
    Hi Chadi,

    In addition to Kam Sing info, Applied Budget and Cost are only pertains to Overhead Variance both Fixed and Variable.

    Applied Budget must be equal to ACTUAL input based on STANDARD output multiply by the STANDARD RATE.

    -------------------------------------------
    Patrick Carangan
    Accountant
    El Giza
    Egypt
    -------------------------------------------








  • 4.  RE:Difference between Flexible, Static and Applied budget

    Posted 05-29-2013 06:52 AM
    Thank you, Patrick.

    -------------------------------------------
    Kam Sing LEUNG CFP, CPA, FCCA
    Controller
    Total Solution Consultancy (Hangzhou) Limited
    Hangzhou
    China
    -------------------------------------------








  • 5.  RE:Difference between Flexible, Static and Applied budget

    Posted 05-30-2013 03:25 AM

    Thank you Kam and Patrick for your useful info.

    I do understand the difference between Static and Flexible, although it is much clearer now from the links you provided Kam.

    I'm reading Gleim materials, "Applied" is sometimes mentioned in there, to overhead as Patrick noted.

    Thanks again, regards,

    Chadi





  • 6.  RE:Difference between Flexible, Static and Applied budget

    Posted 05-30-2013 10:15 AM
    Applied costs is used in when calculating Variable overhead and fixed overhead variances. Its defined as "actual quantity of cost driver multiplied by the standard rate"

    Applied costs (or Applied overhead cost) becomes relevant when calculating variable overhead spending variance and Variable overhead Efficiency Variance as the following:  
    1. Overhead spending variance = Actual Overhead Cost - (Actual Quantity of Cost Driver x Standard Variable Overhead Rate)
    2. Variable Overhead Efficiency Variance = (Actual Units of Cost Driver x Standard Cost Driver Rate) - (Standard Units of Cost Driver x Standard Cost Driver Rate)
    3. Both formulas in 1 and 2 will equal your "variable overhead flexible budget variance"
    For fixed overhead variance its applied as the following:
     1. Fixed Overhead Production Volume Variance = Budgeted Fixed Overhead - Applied Fixed Overhead

    I hope your exam preparation goes well. 

    -------------------------------------------
    Nabil Al Kouali
    Sr Financial Analyst
    Toledo OH
    United States
    -------------------------------------------








  • 7.  RE:Difference between Flexible, Static and Applied budget

    Posted 05-31-2013 09:42 AM

    In manufacturing, I have encountered several terms for Applied Cost: Manufacturing Cost Credit, Standard Cost Earned, Earned Cost Credit, etc... This cost is determined by the standard manufacturing routing which is a list of operations defining the cycle time for each operation. Thus for each cost center in which a unit is produced, the unit picks up the standard cost based on the standard hours earned in that cost center multiplied by the standard hourly rate for that cost center. For example, if the routing has an operation that takes 1 hr for 1000 units, the standard hour earned for each piece produced in that cost center is 1 hr / 1000. Assuming that the standard hourly rate for that cost center is $50.00 per hr, the earned standard cost for that operation is $0.05 per unit produced. The accumulated cost credit by cost center, department, etc... is then compared to actual expenses over a period of time, a week , a month, etc... From this you can now determine a number manufacturing variances such as Spending, Production, Volume variances to name the more common ones.

    At the Production Order level, this also gives you information about performance for each operation of the routing.

    In such an environment, for each unit received into inventory, the conversion cost is valued at standard cost as defined above. The standard material content of each unit is based on the standard Bill of Material. But that's another discussion.

    Note that devil is in the details. Depending on the sophistication of the system used you can track cost, actual versus standard, quite accurately. In general a good Enterprise Resource Planning (ERP) will allow you to do this assuming that all the information is entered into the system. 

    Good luck,
    -------------------------------------------
    Pierre Leonard
    Controller
    Weiss Aug Co Inc
    East Hanover NJ
    United States
    -------------------------------------------