Essential Budgets, Operating Cycle, Costing Systems, And Overhead Allocation For Profit Center Performance Evaluation And Management

Why Flexible Budgets are Essential for Performance Evaluation

Part a:

The flexible budgeting helps in assessing the performance of a product in a most constructive way. This report compares in the actual expenses that have been incurred with the expenses that should have been incurred. This is as per the given level of activity. These expenses should have been incurred keeping in mind the actual level of the activity which can only be obtained from the flexible budget (UNF, 2017).

Flexible budgeting lays down the costs that would be incurred if any specific level of activity or specific number of units are produced by the company. This budget helps in ascertaining the costs for the product. It is used in performance valuation since it concerns with the past costs that have been incurred and so keeping in mind the rate of inflation for the current year, the costs that should have been incurred are computed. And if the costs actually incurred are more than the flexible budged costs, then the performance of that product is bad and if the costs incurred for the manufacture of the product is less, then the performance of that product is bad. The performance of the managers are also evaluated using this sort of budgeting. Similarly, if more costs are incurred, bad performance of a manger and if less, good performance of the manager.

Part b:

The following are the budgets that needs to be prepared:

• Direct labour budget which is the budget which lays down the expense that would be incurred towards the direct labour hours.
• Direct material budget since this lays down the cash that would be paid for the materials that would be supplied in by the suppliers.
• Overheads such as utilities, rent etc since that would include the amounts that would be incurred towards the expenses.

Since all of the above entail payment of cash, these have to be prepared before the cash budget is prepared (Accounting explained, 2017).

Part c:

An operating cycle is the amount of the time that the company consumers from acquiring the inventory to selling off of the inventory and receiving cash from its customers in exchange of the goods that are sold to them. This cycle is important to know since a higher operating cycle would represent blockage of the funds in the business.

Cash cycle deals with cash and operational cycle deals with the operations, hence they are very different (Small business chron, 2017).

Working capital ratio is calculated which is the amount of capital which is invested in the business. For the purpose of calculating the same, the current assets are divided by the amount of the current liabilities.

The data we required for the above is the amount of the current assets and the amount of the current liabilities held by the company.

Part d:

The statement is not true. In fact, the government organisations are more responsible towards the society since they are formed by the money that is paid by the citizens of the company. The maintenance of adequate and proper books of accounting is of an utmost importance for the government organisations too. In order to check their compliance and truthfulness and fairness, these companies are regularly audited by the government and are required to maintain some specific records.

Part e:

The system of costing is the method which is used by the companies for the purposes of estimating the costs that should have been incurred for the manufacture of the product and also, helps in the analysis of the profit, valuation of inventory and controlling of the costs (Accounting explained, 2017).

The following are the desired calculations:

Part d:

The allocation of the overhead rates is of an utmost importance since it helps the company in setting up the prices by the management. These prices are mainly dependent on the cost of the products. It is just not enough to include the direct material and the direct expenses in it. The overheads are used required. Also, the allocation of these overheads helps in an efficient use of the various resources. Further, it complies with the US Generally Accepted Accounting Principles (Flat world knowledge, 2017).

When it comes to the allocation of these overheads, the techniques of traditional based costing and activity based costing method is sued. The traditional based costing method has its own set of problems since it includes allocation of the overheads on the basis of machine hours. Further, the allocation of these overheads results in allocation of the changes to the individual businesses that fosters politics. Also, it understates the profitability of the company. It shows market aggressiveness (Accounting financial tax, 2017).

Part e:

This is mainly done due to the fact that the use of the predetermined overhead rates would result in better decision making as to the budget costs that must be set in so that the new products could be manufactured. Further, they help in ascertaining the costs that would be incurred when manufacturing the products. This rate helps in the allocation of the resources of the business and also set in prices (Small business chron, 2017).

References:

Cash Budget | Format | Example | Master Budget. (2017). Accountingexplained.com. Retrieved 20 September 2017, from https://accountingexplained.com/managerial/master-budget/cash-budget

Chapter 42 Budgetary Control. (2017). Unf.edu. Retrieved 20 September 2017, from https://www.unf.edu/~dtanner/dtch/dt_ch42.htm

Cost Accounting Systems | Managerial Accounting. (2017). Accountingexplained.com. Retrieved 20 September 2017, from https://accountingexplained.com/managerial/cost-systems/

Managerial Accounting 1.0 | FlatWorld. (2017). FlatWorld. Retrieved 20 September 2017, from https://catalog.flatworldknowledge.com/bookhub/reader/4402?e=heisinger_1.0-ch03_s01

Overhead Allocation. (2017). Accounting, Financial, Tax. Retrieved 20 September 2017, from https://accounting-financial-tax.com/2008/08/overhead-allocation/

The Difference Between Operating & Cash Conversion Cycles. (2017). Smallbusiness.chron.com. Retrieved 20 September 2017, from https://smallbusiness.chron.com/difference-between-operating-cash-conversion-cycles-24738.html

Why Do Companies Have Predetermined Overhead Rates?. (2017). Smallbusiness.chron.com. Retrieved 20 September 2017, from https://smallbusiness.chron.com/companies-predetermined-overhead-rates-12212.html