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

Explain the going rate pricing, Going rate or follow the crowd pricing:- ...

Going rate or follow the crowd pricing:- In this method the firm price its products at the similar level as that of the competition. This method supposes that there will be no

Activity based costing, Activity Based Costing (ABC) differs from Absorptio...

Activity Based Costing (ABC) differs from Absorption Costing (AC) in the manner in which overheads are charged to units. ABC charges overheads to units based on their proportion

Costs classification, identify and explain the many classification of costs...

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

Working capital decisions, The decisions about long-term investment are dep...

The decisions about long-term investment are depends on judgments on future cash flows, the improbability of such cash flows and the opportunity cost also of the funds to be invest

State direct material cost standard, State Direct material cost standard ...

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

What procedure are followed in kaizen costing, What Procedure are followed ...

What Procedure are followed in kaizen costing In brief kaizen costing involves setting a new cost reduction target every month. The difference between the target profits and th

Explain phases of life cycle of a product, Q. Explain Phases of life cycle ...

Q. Explain Phases of life cycle of a product? Every product move through a life cycle having five phases as shown in figure and they are 1) Pricing during introduction 2)

Management, Discuss the different roles played by the qualitative and quant...

Discuss the different roles played by the qualitative and quantitative approaches to managerial decision making

Constructing the model, Constructing the Model Steps: 1) Identif...

Constructing the Model Steps: 1) Identify the objectives of the simulation (A detailed listing of the results expected will help to clarify the output variables. 2) R

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