Flexible budgeting, Managerial Accounting

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
Disadvantages of incremental budgeting a) Incremental budgeting suppose activities and method of working will continue in the same way b) No incentive for developing their d

Characteristics of standard costing 1) Flow of information : in a standard costing system cost information flows in a straight forward manner as material is requisitioned and

The significant objectives of short-term cash forecast are as given: find out operating cash requirement anticipating short term financing Organization investment of

Multi-collinearity Multiple regression analysis is based on the assumption that the independent variables are not correlated with each other, whenever the independent variables

State the steps for Standard costing system standard costing system involves the following steps 1) Setting-up of standards for each element of cost: standards should be s

given the above data what would the breakeven in units and dollars be if u wanted a necessary after tax profit of $ 36,000 (assume a 30% tax rate ) units __________ ales dollars _

What is Sealed bid pricing Another from of competition oriented pricing is the sealed bid pricing. In a large number of projects, industrial marketing and marketing to the gove

dentify and explain the many classsification of cost for planning,control,performance evaluation and decision making

INVENTORY CONTROL DECISIONS Factories, workshops, engineering departments handle raw materials used in the manufacture of products. The main objectives in handling these materi