Budgeting helps organize and formalize management’s planning activities. This un

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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 unit also describes and illustrates the use of standard costs and variance analyses. These managerial tools are useful for both evaluating and controlling organizations and for the planning of future activities. Based on the reviews of the Budgets: Operations, Flexible, and Cash Flows Budgets, respond to 3 of the following discussion questions. You are encouraged to research outside sources and, of course, cite them. Do not, however, quote sources word-for-word, but rather, respond to the Discussion Forum Question in your own words.

1. What limits the usefulness to managers of fixed budget performance reports?

2. Identify the main purpose of a flexible budget for managers.

3. What type of analysis does a flexible budget performance report help management perform?

4. In what sense can a variable cost be considered constant?

5. What department is usually responsible for a direct labor rate variance? What department is usually responsible for a direct labor efficiency variance? Explain

. 6. What is a price variance? What is a quantity variance?

7. What is the purpose of using standard costs?

8. give references for your answer.

After you’ve completed the questions above, please provide a brief explanation of how this information is important in managerial decision making.

Explanation / Answer

Answer for the above is as follows:

1. Fixed budget control system is based on the prediction for sales volume or activity level.In this system the budgeted value for each cost necessarily assumes that a fixed amount of sales will occur. It is also known as static budget. The report of fixed budget performance is based on the single predictions, it has the limitation that it is not flexible so it does not permit the management to lower or avoid the worst case scenario and increase sales volume inbest scenario. It fails to display whether actual costs are out of line because of change in actual sales volume or factors like time, business environment. To avoid the limits of fixed budget company can utilize flexible budget as it changes based upon volume it gives a huge level of control.

2. Purpose of flexible budget are:

1- Measurement of performance: flexible budget restructures itself based on activity levels, it is a useful tool for evaluation of performance of managers - the budget must align closely to the expectations at any counts of activity levels. It is very useful tool for managers in planning, who can use it to model the financial results at various different levels of activity.

2- Budgeting efficiency: Flexible budgeting could be used to update easily a budget for which income or other activity figures have not been finalized. In this approach, managers provide their approval for fixed expenses and variable expenses as a ratio of revenues or other activity measures. Then the budgeting staff do the remainder of the budget, that runs through the formulas in the flexible budget and automatically changes levels of expenditure. This approach can advance the efficiency of the process of budget formulation , especially when the team management works through a huge number of iterations.

3. A report flexible budget is helpful for a dissection of the contrast among budgeted performance and actual performance regularly called variance analysis. It originates from the route that the budgeted and planned and actual results around the similar activity level.

4. Variable costs are in relation to fixed costs, that remain relatively constant irrespective of the level of production or business operation of the company. Combined, a company’s variable and fixed costs comprise the whole cost of production.

In accounting, all costs can be explained as either variable costs or fixed costs. Variable costs are inventoriable costs – which are allocated to production units and recorded in the accounts of inventory, like cost of goods sold. Variable costs contains direct labor, direct materials, and variable overhead.

5. Direct labor efficiency variance is equal to the standard direct labor rate which is multiplied by the difference among the standard direct labor hours permitted for good units which is produced and the actual hours worked. Either the department supervisor or personnel department is responsible for direct labor rate variances. Generally, department supervisors are responsible for direct labor efficiency variances.

6. Price variance is the actual unit cost of a purchased item, less its standard cost which is multiplied by the quantity of units actually purchased. The formula of price variance is: (Actual cost incurred - standard cost) x Actual quantity of purchased units.

A quantity variance is the difference among the actual usage of something and its usage expected. For instance, if a standard quantity of 10 pounds of iron is required to build a widget, but 11 pounds are used actually, then there is a quantity variance of one pound of iron.

7. standard costing is used for accounting purposes which simplifies costing process by the decrease of clerical expenses and labor. A full standard cost system is accompanied by standardization of productive activity.

8. i have refered this from Cost and Management Accounting. ICA. Intermediate.

Therefore, Budgeting is the assignment of responsibilities of decision-making and advances the responsibilty of the management. All decision makers wokrs towards the similar goal and aim. Further, the budget helps in improving the performance evaluations which gives a common base for interpretation on how well the manager meet their goals and give a talking point regarding why actual results veered from the original budget. It motivates all areas within the business to be more efficient, which brings a greater efficiency in the company.

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