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
X's Strategy X will like to divide his play between his rows in such a way that his expected winnings or losses when Y plays the first column will be equal to his expected winn

State Direct material cost standard The determination of direct material cost standard would involve: a) Determination of quantity standards and b) Determination of pric

Hi there, i am looking an expert to make my assignments for this subject and i do have other subjects as well. Let me know how you can go through my assignment.

we want to realize our job dreams, we need to think about ourselves as products to be marketed, and in order to do this, we need to contextualize ourselves within the five Ps of ma

identify and explain the many classification of costs for planning, control,performance evaluation and decision making.

QUESTION 1: P A RT A You are the Cost Accountant of an industrial concern and have been assigned the duty of preparing a cost accounting system. Initially it has been de

What is behind the wave of mergers in the banking industry? A: Several economic factors have caused banking institutions to merge over the past several years. These factors inc

The board of a company decides that the strategic objectives of the company should be: * to become established as the best in its field * to be the largest in its market Comment on

Feed-forward control system Feed-forward control system describes a system in which deviations in the system are anticipated in a forecast of future results, so that corrective

Advantages and limitations of game theory Advantage: Game theory helps us to learn how to approach and understand a conflict situation and to improve the decision maki