Flexible budgeting, Managerial Accounting

Assignment Help:

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.


Related Discussions:- Flexible budgeting

Implementation of the decisions, Implementation of the Decisions Once a...

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

Management''s statement of responsibility, 1. A firm's independent auditors...

1. A firm's independent auditors have the responsibility to: a. assess the firm's accounting policies. b. ascertain the firm's profit potential. c. uncover all fraudulent

What are the characteristics of product life cycle, Characteristics of prod...

Characteristics of product life cycle The major characteristics of life-cycle concept are as follows: 1) The products have finite live and pass by the cycle of development i

Eoq model with quantity discounts, EOQ Model with quantity discounts Ci...

EOQ Model with quantity discounts Circumstances frequently occur where firms are able to obtain quantity discounts for large purchase orders. Buying in bulkiness has some merit

Transient analysis-absorbing state, Transient Analysis A state is said...

Transient Analysis A state is said to be transient if it is impossible to move to that state from any other state except itself. This state is temporary and eventually a stead

How can improvement in product design - cost reduction, Improvement in prod...

Improvement in product design may result in cost reduction illustrated below: 1) Material cost : change in design of the product may result in saving in material cost. Economi

Explain out of pocket cost, Explain Out of pocket cost A cost which wil...

Explain Out of pocket cost A cost which will have to be paid to outsides as against cross such as depreciation, which do not require any cash payment this cost is relevant in t

Standard error of the slope, Std error of the slope (Sb) Correlation co...

Std error of the slope (Sb) Correlation coefficient measures the degree of association between two variables such as the cost and the activity level. The standard error of ‘

Breakeven analysis, I am part of a marketing group, and we are working on a...

I am part of a marketing group, and we are working on a project for a local cable company,they currently serve 3,200 customers and sell 50 wireless boxes a month,what I need to do

Preparation of comparative balance sheet, Problem From the following ba...

Problem From the following balance sheets of Dramas Ltd., compute the trend percentages using 31st December 2005 as the base year. Assets & Liabilities

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd