Budgets and flexed budgets Flashcards
Budgets serve several purposes (6)
- Planning annual operations
- Coordinating activities
- Communicating plans
- Motivating managers
- Controlling activities
- Evaluating performance
Developing budgets
Different organisations will produce budgets in different ways:
- Participatory – managers at all levels are involved.
- Zero based budgeting – justify every figure in the budget (can be time-consuming)
- Incremental budgeting – start with prior period and adjust the figure (with percentages) (could add budgetary slack and become inaccurate)
- Rolling budgets – always have a budget for the next time period e.g. next 12 months
Stages in the Budgeting Process
- Communicate details of budget policy and guidelines to those people responsible for preparing the budget.
- Determine the factor that restricts output.
- Preparation of the sales budget.
- Initial preparation of budgets.
- Negotiation of budgets with higher management.
- Coordination and review of budgets.
- Final acceptance of budgets.
- Ongoing review of the budgets.
Types of budgets
- Sales
- Production including inventory levels
- Materials usage
- Materials purchase
- Labour utilisation
- Production overhead budget
- Functional budgets - eg. finance, admin
- Capital expenditure
- Cash flow
- Master, budgeted profit or loss and balance sheet
Budgetary control
We have already looked at why budgets are produced – the main reason is for _________ ___________.
So, once the budgets are completed, what happens?
The difference between the budget figures and the actual figures can be either a favourable variance or an adverse variance. (what do these mean)
We have already looked at why budgets are produced – the main reason is for control purposes.
They are compared to actual figures over the period so that those responsible can understand how they are performing.
Favourable = sales price increase = increase net profit
Adverse = cost of materials increase = decrease net profit
Budgetary control
There can be a variety of reasons for variances:
- Poorly set budget
- Inaccurate cost behaviour assumptions
- Change in suppliers
- Government changes – e.g. living wage
- International changes – e.g. price of oil
- Bad management
- High wastage
Budgetary control
So, once the budgets are completed, what happens? (2)
So, once the budgets are completed, what happens?
- They are compared to actual figures over the period so that those responsible can understand how they are performing.
- The difference between the budget figures and the actual figures can be either a favourable variance or an adverse variance.
Favourable or Adverse variance (2)
From the perspective of Net Profit
- Favourable
- Adverse (unfavourable)
What is a standard cost?
What is a budget? What is standard?
How do we establish standard cost?
- Standard costs are target costs for each operation that can be built up to
produce a product standard cost. - A budget relates to the cost for the total activity, whereas standard relates
to a cost per unit of activity
Establishing standard costs: Two approaches:
- past historical records; Labour and Material usage
- engineering studies
What does Standard Hours Produced mean?
Standard (target) times: X = 5 hours, Y = 2 hours, Z = 3 hours
Output = 100 units of X, 200 units of Y, 300 units of Z
What is the Standard Hours Produced?
Standard Hours Produced
- Used to measure output where more than one product is produced.
Example
Standard (target) times: X = 5 hours, Y = 2 hours, Z = 3 hours
Output = 100 units of X, 200 units of Y, 300 units of Z
What is the Standard Hours Produced?
(100 × 5 hours) + (200 × 2 hours) + (300 × 3 hours) = 1,800 hours
- If actual DLH are less than 1,800 the department will be efficient,
- If hours exceed 1,800 the department will be inefficient.
Note: Different activity measures and other factors (besides activity) will influence cost behaviour.
Standard Hours Produced
Fixed and flexed budgets
What’s the difference?
- Once the flexed budget is produced…?
Fixed budgets remain the same irrespective of the level of activity.
A flexed budget changes with the level of activity. This is commonly used in
manufacturing businesses because if the level of activity changes, then
every comparison between budget and actual will have variances – but this
variance could be mainly due to activity levels being different.
- Once the flexed budget is produced, the variance analysis can be carried
out.
Note we are looking at variance analysis with a variable costing system
Sales volume variance
What is it?
A reduction in sales volume would lead to?
An increase in sales volume would lead to?
This variance handles the change from original budget to flexed budget.
As the only difference between these budgets is the level of activity, this variance considers
that in one figure.
- A reduction in sales volume would lead to an adverse variance.
- An Increase in sales volume would lead to a favourable variance
Direct labour efficiency variance
What is this?
- A reduction in the number of hours taken would lead to …?
- An increase in the number of hours taken would lead to …?
This variance compares the number of hours budgeted against the actual number of hours taken.
This difference is then shown at the budgeted hourly rate.
- A reduction in the number of hours taken would lead to a favourable variance.
- An increase in the number of hours taken would lead to an adverse variance
Direct labour rate variance
What is this
- A reduction in the cost per hour would lead to …?
- An increase in the cost per hour would lead to …?
This variance compares the budgeted cost per hour with the actual cost per hour.
- A reduction in the cost per hour would lead to a favourable variance.
- An increase in the cost per hour would lead to an adverse variance.
Direct material usage variance
What is this?
- A reduction in the cost per hour would lead to …?
- An increase in the cost per hour would lead to …?
This variance compares the quantity of materials budgeted against the actual
quantity used.
This difference is then shown at the budgeted material cost
- A reduction in the quantity of materials usedwould lead to a favourable variance.
- An increase in the quantity of materials used would lead to an adverse variance.
