1. What limits the usefulness to managers of fixed budget performance reports? Flexible budget performance reports have limited usefulness because they do not reflect differences in revenue and variable costs that can occur simply because the actual volume is different from the budgeted volume. This is a serious limitation when evaluating the reasonableness of actual revenues and costs.
2. Identify the main purpose of a flexible budget for managers. The primary purpose of a flexible budget is to help manager better evaluate past performance, which can improve their abilities to monitor and control operations.
3. What type of analysis does a flexible budget performance report help management perform? A flexible budget performance
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In what sense can a variable cost be considered constant? A variable cost implies a constant per unit cost for each unit produced or sold within the relevant range. 5. What department is usually responsible for a direct labor rate variance? What department is usually responsible for a direct labor efficiency variance? Explain. The human resource department is usually responsible for labor rate variance. The production department is usually responsible for a labor efficiency variance. However, the two responsibilities may not be completely separate. For example, a favorable rate variance may have occurred because the human resource department hired poorly trained employees, in which case the production department used more hours than expected (resulting in an unfavorable efficiency variance( because of higher waste. 6. What is a price variance? What is a quantity variance? A price variance is that portion of a cost variance caused by different between the actual unit price of an item and its standard price. A quantity variance is that portion of a cost variance caused by a different between the actual number of the units of an item used and the standard number of units budgeted to be …show more content…
Budgeting helps organize and formalize management's planning activities. This unit extends the study of budgeting to look more closely at the use of budgets to evaluate performance. Evaluations are important for controlling and monitoring business activities.
This awareness helps managers make decisions that protect the financial health of their companies.
References; Heisinger, K., & Hoyle, J. B.(2012). Accounting for Managers. Creative Commons by-nc-sa 3.0.
· Chapter 10 Budget, Budgeting, and Variance Analysis. Retrieved from https://www.business-case-analysis.com/budget.html
The Master budget and flexible budgeting. Retrieved from http://webcache.googleusercontent.com/search?q=cache:8G1s8hmTIiQJ:www.cengage.com/resource_uploads/downloads/0840037031_209383.doc+&cd=7&hl=en&ct=clnk&gl=us
The Role of Budgeting in Management Planning and Control. Retrieved from http://www.flexstudy.com/catalog/schpdf.cfm?coursenum=95075
Budgeting Systems in the Strategic Management Accounting. Retrieved from
[5] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 17, Standard costing and variance analysis, p. 425-436
Variance analysis is the quantitative investigation of the difference between actual and planned behavior. (Drury, C., 2012) It is used to maintain business control. Firstly, this essay will make an analysis that the reason of variance of sales, materials, labor and overhead separately, and the second part is the interrelationship between these variances.
A variable cost is a cost of labor, material or overhead that changes according to the change in the volume (InvestorWords, 2008). Variable costs often include labor expenses and raw material costs, because labor and raw material usually must be increased to increase output. When production is zero, the variable cost is equal to zero. Some examples of variable costs would be cost of goods sold, shipping charges, cost of direct materials or supplies and wages of part-time or temporary staff. While the total variable cost changes with increased production, the total fixed costs stay the same.
Budgets are the financial requirements and consequences of plans. Budgets are made with specific goals in mind. Budgets can be used to lower living expenses, increase savings, or to save for a purpose such as: education or retirement. Budgeting is a process that involves these actions: defining goals, gathering information, forming expectations, reconciling goals and data, monitoring goals and variances, adjusting budgets, and redefining goals.
Variable costs: “Variable costs are costs that vary with the volume of activity”2 and they are: direct labor, Materials, Material spoilage & direct department expenses.
A variable cost is a cost that changes in relation to deviations. In the diabetes clinic I am creating, depending on the volume of patients, items include needles, cotton balls, disinfectant, urine specimen cups and lab equipment related to diabetic blood and urine testing would be considered variable costs. Other equipment includes eye examination tools, scales and blood pressure cuffs. To reduce variable costs, I will not purchase inventory we do
Budgets has been widely used by a lot of organizations since it was first introduced, because it can helps managers to properly plan and control the business’s resources. Successful control mechanisms as Schick believes are the essential to budgetary development (Gray, Jenkins, and Segsworth, 2002, p.11). However, recently the use of budgets to control organizations has been the subject to criticise and debate (Hansen et al., 2003 cited in Libby and Lindsay, 2010). In this era that full of unpredictable environments has make it even harder for a business to achieve the targets set in the budgets. In fact, European surveys also reported that there has been a growing dissatisfaction among organizations about their budgeting system (Neely et al.,
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
In addition, this will also help answer many questions, such as the need for a system/process to decrease the number of commutes, the need for a budget on mileage and/or the need for salaries to be increased to compensate for those miles, the need for an allowance for rental cars for clients to use to eliminate the mileage employees are putting on their cars and the amount of money that is being paid out for that mileage, and etc. In Managerial Accounting, it is very important that the company receives the correct information. In chapter 23 of Horngren’s Accounting it states, “flexible budget summarizes revenue and expenses for various levels of sales volume within a
Participative Budgeting is the situation in which budgets are designed and set after input from subordinate managers, instead of merely being imposed. The idea behind this sort of budgeting is to assign responsibility to subordinate managers and place a form of personal ownership on the final budget. Nearly two decades of management accounting research has resulted in equivocal findings on the consequences and effects of participative budgeting (Lindquist 1995). Participative budgeting certainly has various advantages, these include the transferral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget.
Talbott, J., Brack, L. & Lee, J., 1988. Variance analysis in a service business. Strategy & Leadership, 16(3), pp. 36-40.
Capital budgeting is one of the primary activities of a company. Most of the company uses capital budgeting for decision making process of selecting and evaluating long-term investment. The company have to make a right decision with respect to investment in fixed asset such as purchasing of new equipment and delivery vehicles, constructing additions to buildings and many more. The decision must be right because of the project involve huge amount of cash outflow and it is committed for many years.
Performance budgeting encompasses the causal relationship among program funding and the probable results of that program and uses this information as a means to develop an actual budget. A major focal point of performance budgeting is accountability; this type of budgeting is often utilized by administrators to obtain cost efficiency and establish useful budget forecasting.
Differential costs are the costs that can be avoided and are varied from one alternative to another. In other words, they are the costs which are borne by the company only if an alternative is chosen, whether these costs are variable or fixed (Kumar, n.d).
It requires an adequate and sound organizational structure, that is, there must be a definite assignment of responsibility for each function of the enterprise. Budgeting compels all the members of management, from the top to bottom to participate in the establishment of goals and plans. Budgeting compels departmental managers to make plans in harmony with the other departments and of the entire enterprise. Budgeting helps the management to put down in figures what is necessary for a satisfactory performance. Budgeting helps the management to plan for the most economical use of labor, material and capital. Budgeting tends to remove the cloud of uncertainty that exists in many organizations, especially among lower levels of management, relative to basic policies and objectives. Budgeting promotes an understanding among members of management of their co-workers' problems. Budgeting force management to give adequate attention to the effects of general business conditions. Budgeting aids in obtaining bank credit as banks commonly require a projection of future operations and cash flows to support