A budget variance occurs when the actual results of your financial activity differ from your budgeted projections. Since your expectations were based on knowledge from your financial history, micro- and macroeconomic factors, and new information, if there is a variance, it is because your estimate was inaccurate or because one or more of those factors changed unexpectedly. If your estimate was inaccurate—perhaps you had overlooked or ignored a factor—knowing that can help you improve. If one or more of those factors has changed unexpectedly, then identifying the cause of the variance creates new information with which to better assess your situation. At the very least, variances will alert you to the need for adjustments to your budget and to the appropriate choices.
Overhead costs include rent, office staff, depreciation, and other. Once the flexible budget was complete, variances between the actual and flexible budget could be calculated (Exhibit B). The variance for frame assembly was favorable with actual costs being $82,663 less than in the flexible budget. The variances for wheel and final assembly however were both unfavorable. Wheel assembly had an unfavorable variance of $50,650, while final assembly variance was the highest at an unfavorable variance of $231,200. Taking into account these three aspects of direct cost, direct cost has an unfavorable variance $199,187. Although most overhead costs are fixed, 2/3 of other costs are variable and increase with the increased production. As shown in Exhibit B, overhead variance is unfavorable at $60,000. The direct cost variance and overhead variable together lead to a total unfavorable variance of $259,187.
We will examine the given data from the case and compare the unit costs from the company’s current costing system (traditional costing) and from activity-based costing. We will also highlight other qualitative data in consideration with the numerical factors that may result to a significant change on our recommendation.
Another concern identified, is the utilities expense budget for utilities in Year 9 which is $150,000. This amount is identified as a fixed amount and is unrelated to actually production activities and manufacturing efficiency. Considering that production levels and activity fluctuates throughout the year, the budget for utilities should be a variable item. An example; from Year 7 to Year 8, the utilities expenses increase by $15,000 and with this detection, ways to reduce this expense should be investigate. Another concern is a duplicated line item under the Selling, General, and Administrative Budget for Utilities and Utilities and Services. Another issue for concern, Total Variable Cost was reported to be lower; however was not enough for the lack of sales combined with an increase in advertising and transportation which resulted in an overall negative result. The low Net Sales directly impacted the Contribution Margin which decreased by $49,397. Overall, these concerns indicate the need for a flexible budget with variance analysis.
The main reason behind it is that the variance analysis of materials, labor, and overhead indicates the difference between original budget and actual sales/amount. It explains that the management should make changes in the budgets in order to diminish the chances of failure (Epstein & Jermakowicz, 2010). Moreover, the company should make changes in its all budgets like production budget, sales budget, manufacturing budget, selling budget and general & administrative. These changes would be helpful to reduce the difference between the actual and projected sales of the firm.
2. Considering your answer to item 1, the first three exhibits, and related introductory discussion, is it likely that the accounting system may distort product profit significantly? Why? (Ignore general, selling, and admin expense.)
Assess the degree to which the firm’s accounting reflects the underlying business reality. Identify accounting distortions and evaluate their impact on profits and the sustainability of profits.
Cost Accounting: Its role and ethical considerations Introduction: Accounting is the process of identifying, measuring, and communicating economic information about an entity for the purpose of making decisions and informed judgements. The major areas of within the accounting are: Financial Accounting, Managerial Accounting/Cost Accounting and Auditing- Public Accounting Managerial accounting is concerned with the use of economic
Erin should notify Smart Worx of the postponement as it is consistent with ethical principles of integrity and professional competence. As Erin is complying with these codes of ethics, she has nothing to lose or suffer as she followed the guidelines of the code and therefore cannot be
Use of the flexible budget shows the budgeted operating income given the actual sales. When you compare the flexible budget to the actual budget you are able to compare the total sales and cost incurred given the same units sold. The sales price variance, which is the actual sales less the flexible budgeted sales, was $14,700 favorable. This means that actual sales were higher than budgeted sales at that usage. This is attributable to the increase in service price from $25 to $26.40. Price variance for material usage was $2,100 over the flexible budget projection. This could be attributed to overuse or waste of materials. As expected, the direct labor price variance was $3,375 lower than the flexible budget amount. This is attributed to the manager’s effective use of labor. Operating expenses were also higher than the flexible budget
Companies will have set guidelines to trigger the need for a variance report such as variances over a specific percentage or dollar amount. (Cleverly, Song, & Cleverly, 2011, Pg. 381) In an analysis of revenues, a negative variation is unfavorable; in an analysis of costs, a negative variation is favorable. (Dove & Forthman, 1995) Variation is calculated by subtracting the expected or budgeted figure from the actual figure for each variable. The variable figure is then divided by the expected figure in order to establish a percentage of the variance. Wages that are over the budgeted amount would be an unfavorable variance and would be an indication that there is a need for a variance report. (Dove & Forthman, 1995) Supply costs being less than the budgeted amount would be a favorable variance, however it could result in the supplies budget being reduced if there is not a reasonable explanation as to the cause for the variance. Therefore, a variable department manager would ask for a variance report detailing the reason for the variance to be completed, otherwise it appears as if the budget is overstated and needs to be reduced.
Since a company’s’ budget is typically based on knowledge from their financial history therefore, if a budget variance occurs, it can be because inaccurate estimates were done, or one or more factors have changed unexpectedly, and the company need to make some type of adjustments to their budget. Once a company discovered a significant budget variance, they will need to identify the cause, and address it accordingly. For example,
The board of directors of the Cortez Beach Yacht Club (CBYC) is developing plans to acquire more equipment for lessons and rentals and to expand club facilities. The board plans to purchase about $50,000 of new equipment each year and wants to begin a fund to purchase a $600,000 piece of property for club expansion.
There are different costs that respond to the different activities like variable costs are directly associated with the products sold. The cost behavior patterns of selling, general, administrative, and other operating expenses are determined, and these expenses are budgeted accordingly. For example, sales commissions will be a function of the forecast of either sales dollars or units. The historical pattern of some expenses will be affected by changes in strategy that management may plan for the budget period. In a participative budgeting system, the manager of each department or cost responsibility center will submit the anticipated cost of the department 's planned activities, along with descriptions of the activities and explanations of significant differences from past experience. After review by higher levels of management, and perhaps negotiation, a final budget will be established. Because of the necessity to recognize cost behavior patterns for planning and control purposes, overhead costs will be classified as variable or fixed.
This paper will describe the differences between static and flexible budgets. Budgeting is a key component of financial management in any business. The most traditional form of budget is the static budget, which is one "that incorporates values about inputs and outputs that are conceived before the period in question begins" (Investopedia, 2012). This concept will be contrasted with a flexible budget. This technique allows for the values of inputs and outputs to be changed at any point, or at multiple points, during the period in question. The company would normally make such a change whenever it is realized that the change is needed. A new price from a supplier, for example, could be reflected immediately in a flexible budget, rather than at the end of the period. This and other differences between the two types of budget will be outlined in the course of this paper. The first section will explain the relationship between fixed and variable costs in a flexible budget. The second section will discuss the differences between static and flexible budgets. The third section will explain how flexible budgets can assist with cost-volume-profit (CVP) analysis.