Budgeting part 2
- Created by: Zhenya Dzhungurova
- Created on: 03-03-19 22:43
Ideal and practical standarts
Ideal standarts - requires companies to be ideal efficient
Practical standarts- the reallity (machines can be broken, labour to be lazy)
Information used to developed standarts - past information, future changes and present situation
Standart cost
A budget for a single unit of production
Standart cost of direct material = Quantity of DM * Price of DM
Standart cost of Direct Labour = Hours of DL* Volume
Budgetary control
1. Prepare budgets
2.Perform and collect information
3.Respond to variances between planned and actual performance
Income statement
Unit sold
Sales revenue
Direct Material costs
Direct Labour costs
Total costs
Contribution Margin
Indirect salaries
Rent
Depreciation
Other overheads
Total Fixed costs
Profit
Variances
Differences in costs and revenue between planned/budget/standart and actual
They can be favorable and unfavorable
-favourable - profit is higher than expected one or/and costs are lower than expected
-unfavourable - profit is lower then expected one and/or cost are higher then expected
---> can be problematic, because the budget and actual one are based on different output volume
Flexible budgets
Estimate what revenies and costs should have been, given the actual level of activity for the period .
Activity-level variances
The difference between static master budget and flexed budget.
-Difference due to vlume change only
Flexed-budget variance
The difference between actual results and flexed budget.
-Difference due to price and quantity variances
Sales volume variance and sales price variance
Sales volume variance- difference in profit between master and flexed budgets
=(Budget Q - Actual Q)* Standart contribution per unit
Sales price variance -difference in sales between the flexed and the actual budgetes
=(actual price per unit-budgeted price per unit)*Actual Volume
Management by exception
Why things are above favourable and unfavourable limits? These assumptions are signal for investigations.
Side-effects occur with output/result control
-employee will concentare only on what is monitored by the control system
-personal goals cannot correnspond with the wider organizational goals
-the actions are concentared in short-term goals and long-term implications are not taken into account
Conrollability principle and how the principle can
It is appropriate to charge to an area of responsibility only those costs that are influenced by the manager of that responsibility center.
-if the manager can control both - price and quantity for a service then the manager is responsible for all the expenditure
-if the manager can control the quantity of the service but not the price paid for the service the only that amount of difference between actual and budgeted expenditure that is due to usage should be identified with the manager
- if the manager cannot control either the quantity or the price paid for the service then the expenditure is uncontrollable and should not be identified with the manager
Distinguish between participation and top-down bud
Participation - subordinates or budgetees are able to influance figures in their budgets or targets / bottom-up budget setting
Top-down budget setting - subordinates have little influance on the target setting process
Advantages in participation:
-more likely to accept targets and be committed to achieving them
-can reduce the information asymmetry gap that can occur when standarts are given from above
-subordance have more information than their superiors
-more effective targets to be set
Advantages in top-down budget setting
-performance is measured by precisely standarts
-improvement in performane -increase targets
-participation is not adequate in ensuring commitment to standarts
-is better where process is highly programmable and there are clear input-output relationship
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