Flexible budgeting, Managerial Accounting

FLEXIBLE BUDGETING
Flexible budget may be used in one of two ways: Planning and Control.

At the planning stage when budgets are set, to reduce the effect of uncertainty. For example, suppose that a company expect to sell 10,000 units of output during the next year. A master budget (the fixed budget) would be prepared on the basis of this expected volume. Though, when the company thinks that output and sales may be as low as 8,000 units or as high as 12,000 units, it might prepare emergency flexible budgets, at volumes of say, 8,000, 9,000, 11,000, 12,000 units. The advantages of planning with flexible budgets include:

1) Finding out well in advance the costs of layoff pay, idle time and so on if output falls short of budget;

2) Deciding whether it would be possible to find alternative uses for spare capacity if output falls short of budget (for example, whether employees could be asked to overhaul their own machines instead of paying for an outside contractor);

3) Estimating the costs of overtime, sub-contracting work on extra machine hire if sales volume exceeds the fixed budget estimate, and finding out if there is a limiting factor which would prevent high volumes of output and sales being achieved.

4) It has been suggested, however, that since many cost items in modern industry are fixed costs the value of flexible budget in planning is dwindling.

For illustration:

In many manufacturing industries, plant cost (depreciation, rent and so on) is a very large proportion of net costs, and these tend to be fixed costs;

Wages costs also tend to be fixed, because employees are generally guaranteed a basic wage for a working week of an agreed number of hours.

With the growth of service industries, fixed salaries and overheads will account for most of the costs of a business, and direct materials will be relatively small portion of total costs.

Flexible budgets are also used retrospectively at the end of each month (control period) or year, to compare actual results achieved with the result that would have been expected if the actual circumstances had been known in advance. Flexible budgets are an essential factor in budgetary control and variance analysis.

Posted Date: 12/7/2012 8:24:06 AM | Location : United States







Related Discussions:- Flexible budgeting, Assignment Help, Ask Question on Flexible budgeting, Get Answer, Expert's Help, Flexible budgeting Discussions

Write discussion on Flexible budgeting
Your posts are moderated
Related Questions
School problem is asking to calculate the work in progress inventory for the beginning of a month without providing previous month data.

State overhead expenses It is to be noted that the term overheard has a wider meaning than the term indirect expanses. Overheads include the cost of the indirect material and

How can we draw a break even chart Under this method the variable cost line is drawn first and then fixed cost line is drawn over and parallel to the variable cost line. The fi

Explain performance budgeting according to seal and summers According to seal and summers performance budgeting comprises three elements:  a) The result (final outcome)

Algebraic method of the break even point The break even point can be computed by the following method: a) Units of sales volume . b) Budget total or in terms of money va

Suggestion system  The suggestion system is as integral part of an established management system that aims at involving employees in kaizen. The number of worker s suggestion i

State performance budgeting according to carter performance According to carter performance budgets use statement of mission goals and objectives to explain why the money is be

One of the main deities of the financial manager is to keep a sound liquidity position for the firm hence the dues are settled as and while they mature. Separately from this the fi


Implementation of the Decisions Once alternative courses of action have been chosen, they must be implemented as part of the budgeting procedure. The budget is a financial plan