The purpose of this memorandum is to explain the flexible budget variances and how to interpret the information and the recommendation in what action to take. Attached is a flexible budget to show the revenue expected and the expenditure allowed for the actual number of units that were produced and sold. To see the comparison between the flexible budget and the actual revenue and expenditures helps to tell the difference from the original productivity. IMPORTANCE OF FLEXIBLE BUDGET
A flexible budget is a budget which is normally in the form of an income statement which can be adjusted to any particular range of production. Fixed costs do not change in a simple flexible budget constant while variable and semi-variable costs change based
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The relationship prevailing between different variances are revealed by sub-division of variance analysis. Variance analysis is highly useful for fixing responsibility of an individual or department or section for each variance separately. Variance analysis highlights all inefficient performances and the extent of inefficiency. It is useful for controlling and reduction of cost. Classification of variance into controllable and uncontrollable variances helps in ensuring that controllable variances are taken into consideration for further action. It helps management to carry out proper profit planning work. It creates cost consciousness in the minds of every employee of a business organization (accountlearning 2018). The detriment of variance analysis such as flexible budget variance is that it needs more time to prepare, delays the issuance of financial statements, does not measure revenue variances, and may not be applicable under certain budget models (Bragg, 2017). Additionally, a static budget is not effective for evaluating the performance of cost centers. Similarly, when revenues are much higher than expected, the managers of cost centers have to spend more than the amounts indicated in the baseline static budget, and thus seem to have unfavorable variances, though they are simply doing what is needed to keep up with customer demand (Bragg,
In Part II, Section D, it mentions that the salaries of the managers are fixed cost while the salaries of the staff are variable costs. I wanted to know how to represent that in my excel spreadsheet. In the meet session, I learned that the fixed salary of the managers amounted to $800,000 and through subtraction from the total salary amount of both the managers and the staff of $6,900,000 resulted in the budgeted variable cost of $6,100,000 for the staff salary. Furthermore, calculating the variable salary of the staff to 10 percent above produces a salary of $6,710,000 while 10 percent below produces a salary amount of $5,490,000. As a result, I was able to complete flexible budget data in my excel spreadsheet.
[5] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 17, Standard costing and variance analysis, p. 425-436
While attempting to solve Jake’s gas budget variance, it is essential to highlight a working definition of budget variance. A budget variance is “A difference between the actual results of your financial activity and your expected, budgeted results” (Siegel & Yacht, 2009, p. 104). In other words, what you budgeted for is one thing; your expected result proves a different outcome.
Variance analysis is largely used by the management to ascertain the strengths and weaknesses of internal
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.
As candidly asserted, fixed costs are those which do not change with the level of activity within the relevant range. Irrespective of what happens in an organization’s production capability, these costs will incur. A valid example is a manufacturing company who will undoubtedly meet its rent expenses or obligations whether its units of production increases or decreases. The rent being paid for a production facility is not determined by the level of activities such as the volume of goods sold, and the volume of goods manufactured. In the understanding of fixed costs, let’s say, for instance, Apple Inc. has a fixed cost of $200,000 per month, if unfortunately, only ten iPhone are produced in that month, the fixed cost of $200,000 will incur and if, by chance the company sold 50,000 pieces of iPhones, the fixed cost will not be affected. So it is obvious that fixed costs remain unchanged in total as the level of activity changes (Heisinger & Hoyle,
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?
Talbott, J., Brack, L. & Lee, J., 1988. Variance analysis in a service business. Strategy & Leadership, 16(3), pp. 36-40.
Introduction The author of this paper works for a for profit professional university. The university uses a typical fiscal year date of July to July. The budget cycle though is on going with continuous monitoring of the overall operational budget and unit budgets throughout the year. The process of building the next year’s budget starts in the spring with guidelines/perimeters given by the chief financial office.
...xplaining how much variance is caused by utilizing resources or how much is associated with the cost of using resources (Edwards-Nutton, 2008). For example, through standard costing, variance analysis helps to evaluate the costs of materials over time to identify trends and areas of concern.
According to Argyris (1953), “budgets frequently serve as a basis for rewarding and penalizing those in the organization” (Argyris, 1953, p. 97). Further, Argyris (1953) describes a budget as a measuring instrument, which sets goals which mean that people can be measured in this way (Argyris, 1953). People tend to have a problem with this and complain about this part of the budget as no one wants to seem as inefficient. For supervisors, budgets can be a way to put things in writing, and thus vent other unrelated issues (Argyris, 1953). Also, budgets can be considered to be pressure devices to keep employees on track and motivated, while also being pressured (Argyris, 1953).
Bana, SE (Panciu) & Sgârdea, F 2009, ‘Cost management and cost control in decisional process of organizations’, Annales Universitatis Apulensis : Series Oeconomica, vol. 11, no. 1, p. 65.
A disadvantage of this type of budgeting is that it leaves room for erroneous reporting by departmental heads to ensure their programs are not cut due to lack of performance output. Performance budgeting can become a burden for substantial budgeting endeavors as funding requirements for various agencies can vary
Financial Report for a School Production AIM: The aim of the financial report is to supply information on the costs and revenue of the school production to the school governors. The finance office had some data on the income and expenditure of the school production. This was used to generate an analysis of the revenue of the production for the governors meeting. REVENUE:
and Mrs. Long to deal with current issues faced with the company. Firstly, the difficulties of growth in ensuring the opportune payments to employees and suppliers could be release if managers could make an expenditure budget and set up appropriate prices of flowers according to the estimate costs in current month by using the chosen method above, due to the fact that there now are only rough estimates of revenue and some main cost items are know. Also, to prevent the scale of operations grown in an uncontrollable way, the method chosen can help Mr. and Mrs. Long get the signal of the deficit before decisions cannot be reversed, because the method chosen could provide them the cost of each department to help them find out the problems more easily and