Budgeting part 2


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

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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 

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Budgetary control

1. Prepare budgets

2.Perform and collect information 

3.Respond to variances between planned and actual performance 

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Income statement

Unit sold 

Sales revenue 

Direct Material costs

Direct Labour costs

Total costs 

Contribution Margin 

Indirect salaries



Other overheads

Total Fixed costs 


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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 

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Flexible budgets

Estimate what revenies and costs should have been, given the actual level of activity for the period .

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Activity-level variances

The difference between static master budget and flexed budget.

-Difference due to vlume change only

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Flexed-budget variance

The difference between actual results and flexed budget.

-Difference due to price and quantity variances

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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 

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Management by exception

Why things are above favourable and unfavourable limits? These assumptions are signal for investigations.

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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 

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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 

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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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