Flexible Budget Research

The total cost of production of Sony’s new product is the addition of both fixed and variable costs. Fixed costs are assets within a business that are not used up or sold during the typical production course e.g. buildings and machinery. Variable costs are costs that fluctuate in time with the production output or sales revenue of a company such as Sony e.g. raw material and labour costs. Figure 1.1 shows how the total cost is composed of both fixed and variable costs.

A more difficult task is identify and planning for variable costs. Variable costs can change from month to month and sometimes cannot be planned for.

A budget is a projection/estimation of the financial requirements and burdens that an individual/business drafts to understand their spending and financial boundaries. A budget generally outlines the situation a person will be in financially and can be created using estimates of future incomes and expenses.

1. Assume that a company is budgeting to sell 2,500 units of a product at a selling price per unit of $32. The variable cost per unit is $26 and total fixed costs are $5,000.

Answer: A firm's fixed cost is a periodic cost that remain unchanged as output changes. Variable costs are the costs that change as output change. The number of ovens in a bakery usually do not change, so the cost of ovens is fixed cost. The cost of salary paid for employees sometimes changes, thus this cost could be a variable cost.

3 variable costs indentified, they are power, operations, material. They are proportional to the revenue intake.

Flexible budgets separate the fixed and variable costs, which then allows for budgets to be set automatically to an activity level. Thus, variances between actual costs and budgeted costs are set for volume fluctuations before differences due to price and quantity factors are computed. At first, flexible budgets are used to accurately measure performance because they compare actual costs for a given output with the budgeted costs for the same level of output. The bad thing of a flexible budget is that, by not allowing the manager to insert set figures, it is also difficult to estimate. Instead of looking at an estimate of what to expect financially, the manager is left looking at a range of estimates. Excellent Year Ltd should adopt fixed budgets when its demand is

Fixed overhead are costs that remain constant when production output changes (Rose, 1964). They continue to occur of whether production has decreased, increased or haven’t taken place. For instance, depreciation of plant and machinery, rent, salaries and legal and accounting costs are fixed costs. Fixed overheads are constant in the short run and the costs of all factors of production are variable in the long-run. Therefore, overheads that are fixed in the short run are usually not fixed in the long run thus proposing that in the long run there may still be fixed overheads although some of the then fixed overheads become variable overheads. (Fess). For example, labour may be fixed in the short run, but it transforms to be variable in the long run.

The keen competition requires companies to consider the cost variable. But traditional budgeting method separates the cost into variable and fixed, put the emphasis on the variable cost and consider the fixed cost implacable.

9. The budget period 10. Budget cycle of a manufacturing firm 11. Steps in developing a master budget 12. Comprehensive budget illustrated 13. Flexible budgeting 14.

The budget is an important basis for evaluating performance. It can provide benchmarks against which to judge success or failure in reaching goals and facilitates timely corrective measures (Bragg, 2010). Budgeting forms the baseline for a company 's future performance. Managers create the budget anticipating financial conditions and market expectations for future periods. These managers calculate revenues and expenses for the period being budgeted. When the period reflected in the budget arrives, the managers compare actual expenses to the budget numbers and evaluate the department 's performance (Bragg, 2010).

Step-variable costs are costs that follow a step-cost behavior with narrow steps (resources must be purchased in small chunks).

When budgeting for the future as well as estimating costs for production of goods in the present there is a need to assess the prices of the direct inputs. The direct costs are those which are directly incurred as a result of production and can be completely attributed to that production. These costs will include materials, labor and other expenses such as power. The process of costing may appear simple; to calculate the direct costs and then allocate the indirect costs. However, while the concept may appear simple, the practice can be difficult with a number of potential sources of error which may lead to wrong assessments.

In the simplest term, total cost is all the costs incurred in the production of a product or the engagement of an activity. Total costs are calculated through adding together the total fixed costs and the total variable costs. Variable costs are costs that change based on the amount of goods bought or the amount of services used. Fixed costs are costs that don’t change each month due to having no relationship with the amount of products produced.

1) Fixed cost - Costs that do not vary with the quantity of product produced.