Question

How do managers use flexible budgets to set predetermined overhead rates

Answer 1

Flexible budgets are used by managers to help set predetermined OH rates by:
- allowing managers to identify the manufacturing H costs to be incurred and what the behaviors (variable, fixed, or mixed) or those costs are.
-allowing managers to separate mixed costs into their variable and fixed elements
- providing information on the budgeted costs to be incurred at various levels of activity
- providing the impacts on the predetermined fixed OH rate (or on a plant wide rate) from changing the denominator level of activity.
If an organization's departments use significantly different types of work effort or material processing, flexible budgets and predetermined OH rates generally should be computed using departmental rather than plant wide information