The performance of a cost center can be evaluated by comparing its actual costs with the…

The performance of a cost center can be evaluated by comparing its actual costs with the corresponding amounts in the flexible and master budgets. A flexible budget is a summary of anticipated costs for a range of activity levels. It provides forecasted cost data that can be adjusted for changes in the level of output. A flexible budget is derived by multiplying actual unit output by predetermined standard unit costs for each cost item in the report. The resulting variances between actual costs and the flexible budget can be examined further by using standard costing to compute specific variances for direct materials, direct labor, and overhead. The performance of a profit center is usually evaluated by comparing the profit center’s actual income statement results with its budgeted income statement. When variable costing is used, the controllable costs of the profit center’s manager are classified as variable or fixed. The resulting performance report takes the form of a contribution margin income statement instead of a traditional income statement. The variable costing income statement is useful because it focuses on cost variability and the profit center’s contribution to operating income.

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