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Hello,
1. are flexible budgets always prepared on marginal costing principles?
2. if no, then when preparing under absorption costing, how to deal with the fixed cost, does it remain fixed or will it change (by calculating OAR and then charging).
Or is it that absorption costing is just used for variance purpose and not actually for preparing the flexible budget. I have watched your lecture and did not understand why you flexed the fixed cost, perhaps the above answer will clear.
Many thanks
1. No – I can be either marginal or absorption and (2) with absorption costing the fixed overheads remain unchanged.
It is for variance analysis that I flex the fixed overheads using absorption costing simply to explain why the fixed overhead variances are as they are. You would not be required to flex is asked to produced a flexed budget using absorption costing, but in variance analysis it is important to understand why the fixed overheads are as they are.
(Having said that, basic variances (including the fixed overheads variances) are rarely relevant for Paper PM (because they are all examined in Paper MA (was F2). Almost all variance questions in Paper PM are concerning the advanced variances.)
Sorry, I must confirm this before proceeding,
If asked to calculate the standard cost either by marginal costing principles OR by absorption costing, the fixed overheads in the flexed/flexible budget will remain unchanged (i.e. same as in the original budget). You flexed the fixed overheads in the lectures for the sole purpose of variances (as you mentioned above)
Good day!
That is not what you asked before 🙂
The standard cost is the cost per unit and if it is absorption costing we absorb the fixed overheads to get a fixed overhead per units and include it in the total cost per unit.
As far as flexed budgets are concerned, that is budgeting the total costs, and the total fixed cost remains the same regardless of the costing method used.
I only flex the fixed costs in the lecture on variances to explain why we analyse the fixed overhead variance the way that we do when it is absorption costing.
Okay, I watched all the variance lectures again and came to following conclusion, are they correct
1. if required to prepare flexed budget (either with MC or Ab. Costing) then the FC remains the same (as original budget)
2. We just flex the FC for variance analysis only and that is why we end up calculating the
fixed overhead volume variance.Hope this makes sense & sorry if repeating the questions again (in any way)
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