In discussion unit 6, we are going to discuss some important questions which are related to the topics of this unit, that is the Budgets: Operations, Flexible, and Cash Flows Budgets.
All of the questions will be useful for the managers when they are preparing or have something to do with budgeting issues in their company. For the students or the people who have an interest in business, it can give a knowledge about the budgeting issues. We will find the answer for each question one by one.1. What limits the usefulness to managers of fixed budget performance reports?Before we answer the question, we are starting with the definition of budget itself. Budget is a set of formal information, where we can find all the plans, goals and also the objectives that are going to be achieved by management and it consist of all the operations aspects available for a certain time period (K. S, Jae & G.
S, Joel). Fixed budget is static, so it means that all the number is already set up. Things that limits the usefulness of fixed budget is fixed (static) budget is only appropriate for the departments who have the activity or job desk not related with direct relation to sales activity, production and others working area which has volume result in the company (K. S, Jae & G.
S, Joel). So, it cannot include other departments which have a volume based activity like production, sales and others operations departments.2. Identify the main purpose of a flexible budget for managersFlexible budget is a budget which permitted us adjust when there is changing due to unexpected things (“What are the advantages of using a flexible budget vs. a static budget?,” n.d.).
The main purpose of flexible budget is to give adjustment for predictions, adapting change, control and evaluation, and inflation and variance (Davoren, n.d.).
Adjustment for prediction mean the adjustment for conditions out of our control which can cause an impact to the sales and production quantities for example. With the flexible budget, there is a range where the budget allowing us to adjust all of the things beyond our prediction. Adapting change means to adapt the changes to the environment around us which changes quickly. The control and evaluation means we can control and evaluate the performance of budget when we face change in our sales or the production volume. We can directly adjust the cost for the deviation happened. And we can easily evaluate the profit due to this issue.
Inflation and variance, it allows us to adjust whenever there are changes or variance in the cost of materials for production, the price of the product, wages of our employees and overhead cost as well. 3. What type of analysis does a flexible budget performance report help management perform?The answer to the above question is variance analysis. Variance analysis itself defined as an investigation based on the quantitative analysis of the difference founded between the actual and planned budget.
The investigation covers all variances involved like purchase price variance, labor rate variance, variable overhead variance, fixed overhead spending variance, selling price variance and other (“Variance Analysis,” n.d.).Variance analysis will underline the main causes of variation happened in regard of the money received and the money spent during a certain period with the available budget (“Variance Analysis,” n.d.).4. In what sense can a variable cost be considered constant?We will find that a variable cost be considered constant when we count the total variable cost.
The formula for total variable cost as the following: Total variable cost = variable cost per unit x number of unit or activity. In the calculation of variable cost, with the assumption the range and time period considered still relevant, the cost per unit will remain constant even the total amount of variable costs are change based on the activity happened (“Fixed and Variable Cost,” n.d.).
For an example, the company spent cost for the material $3 for each unit of product. Suppose the company produce 500 units it becomes $3 x 500 = $1500, if the company increased the quantity become 1000 units it becomes $3 x 1000 = $ 3000, and we can see that the material cost remains the same $3.5. What department is usually responsible for a direct labor rate variance? What department is usually responsible for a direct labor efficiency variance? Explain.We first explain the definition of direct labor rate variance and direct labor efficiency variance. Direct labor rate variance is the difference between actual cost (actual quantity x actual rate) minus standard cost of actual hours (actual quantity x standard rate) (“Direct Labor Rate Variance,” n.
d.). Meanwhile, for direct labor efficiency variance is referred to the variance that resulted from the difference between the standard and actual time that company used for producing a finished product (“Direct Labor Efficiency Variance,” n.d.).Who is responsible for each of them? Direct labor variance is the responsibility of the human resources department, why? Because the human resources department is the one who negotiate wages as low as they can with the employees and also labor union (Jan, n.d.
). And then for direct labor efficiency variance is the responsibility of production department, why? Because direct labor efficiency variance is used to measure how effective the production performance by using the available workers with each of their abilities (“Direct Labor Efficiency Variance,”n.d.
).6. What is a price variance? What is a quantity variance?Price variance is the result that we got after the actual cost incurred deducted with standard cost and then multiply with the actual quantity of unit purchased.
The price variance become favorable if the actual cost incurred, less than the standard cost, and vise versa (“Price Variance,” 2017).And the quantity variance is variance which comparing the standard quantity forecasted to be used with the actual quantity. If we want to have the quantity variation per unit price, then we multiply with the standard price (“Variance Analysis,” n.
What is the purpose of using standard costs?Standard costing is a formula where the company able to planning their budget, managing and also controlling all the costs and then with this formula the company able to evaluate the cost after certain period (Wilkinson, 2013). The purpose of standard costing are as the following: – Fixing the responsibility, if there is a variance after conducting the variance analysis in the standard costing.- Management by exception, it means that we prefer to pay attention on the major projects rather than minor project.- Study of time and speed, it is related to how we improve in calculating standard cost quickly with minimum time consuming,- Helpful in production policy, it means that the company can make a good product suppose we know all the variance completely.
– Helpful in planning budget, the standard costing make it more easy.- Increase in efficiency, standard costing giving awareness among the employees, so they will try their best and efficient or they will be fired if they cannot improve.- Easy to evaluate the stock, with standard costing, the company can evaluate it easily.
– And easy to delegate powers, the performance of employee can be measured by checking the variance, the employee who doing their best will considered has power, so the company can delegate the job the competence employee (Kumar, 2011).From above questions and answer which giving a deep explanation about our topic the Budgets: Operations, Flexible, and Cash Flows Budgets we can conclude that there are many things involved when we talked about budget in the company. The level of the complexity also depend on the type of the company and the size of the company. All above questions and answers giving a perspective for the managers and people who has interest in the business about what budgeting is, and what kinds of things related with it. It is not simple, but even it is complicated, we still can learn about it.