Management Accounting Budgeting And Variances: An Overview

Calculating the flexed and actual budget

Describe about the Management Accounting Budgeting and Variances.

Flexible Budget
Particulars	Amount	Amount Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Sales		769,500
Variable Cost
Direct materials	194,400
Direct labour	202,500	396,900
Contribution		372,600
Fixed overhead		128,000
Net profit		244,600

Table 1: Depicting the flexible budget

(Source: as created by author)

Actual Budget
Particulars	Amount	Amount
Sales		753,300
Variable Cost
Direct materials	192,500
Direct labour	221,000	413,500
Contribution		339,800
Fixed overhead		130,000
Net profit		209,800

Table 2: Depicting the Actual budget

(Source: as created by author)

With the help of table 1 and 2, the overall flexible and actual budget could be effectively evaluated. Moreover, from the flexible budget the overall profit of the company has been seen increasing, which states that flexible budget might help in improving the overall budget value. Quan et al. (2013) mentioned investor to reduce the variance in overall budget mainly uses that flexible budget.  The table 3 mainly states the variance analysis of flexible and actual budget of the company. The variable cost and fixed overhead cost have positive amount, which states the favourable assumption taken in the budget. However, the sales price and sales units has negative value, which depicts the low profit generation capital of the company.

Variance
Particulars	Actual	Flexible	Variance
Sales	753,300	769,500	(16,200)
Variable Cost	413,500	396,900	16,600
Contribution	339,800	372,600	(32,800)
Fixed overhead	130,000	128,000	2,000
Net profit	209,800	244,600	(34,800)

Table 3: Depicting the Variance

(Source: as created by author)

Sales variances; volume and price:

Sales volume variance
Particulars	Amount
Actual unit sold	810
Budgeted unit sold	800
Budget price per unit	950
Sales volume variance	9,500

Table 4: Depicting the Sales volume variance

(Source: as created by author)

Sales price variance
Particulars	Amount
Actual price	930
Budgeted price	950
Actual unit sales	810
Sales price variance	(16,200)

Table 5: Depicting the Sales price variance

(Source: as created by author)

With the help of table 4 and 5, the overall sales price and volume could be evaluated. In addition, the sales volume variance has been detected as positive, while the sales price variance is negative. This only indicates that company is selling more products by reducing the prices of the products. Lee et al. (2012) mentioned that price of the products is mainly calculated based on demand and supply of the product.

Direct material price variance
Particulars	Amount
Actual quantity	7,000
Actual price	28
Standard price	30
Direct material price variance	(17,500)

Table 6: Depicting the Direct material price variance

(Source: as created by author)

Direct material usage variance
Particulars	Amount
Actual quantity	7,000
Standard quantity	6,400
Standard price	30
Direct material usage variance	18,000

Table 7: Depicting the direct material usage variance

(Source: as created by author)

With the help of table 6 and 7, the overall variance of direct material usage and price can be evaluated. Moreover, the material price variance is mainly negative, which depicts the overall decline in costs of the overall material. In addition, the material usage variance has mainly increased from the expected budget, which states the demand of quantity is high. The actual production is relatively high, which states the high amount of quantity needed by the company to support the rising demand. Kaplan and Atkinson (2015) stated that with the help of variance analysis companies are able to improve the budget process and reduce the overall negative impact from external forces. The decline in actual production price is relatively adequate, however, the assumption of the material usage is negative, which might reduce continuity of the production process.      

Direct labour efficiency variance
Particulars	Amount
Actual hours	8,500
Standard hours	8,000
Standard rate	25
Direct labour efficiency variance	12,500

Variance analysis of flexible and actual budget

Table 8: Depicting the Direct labour efficiency variance

(Source: as created by author)

Direct labour rate variance
Particulars	Amount
Actual quantity	8,500
Actual rate	26
Standard rate	25
Direct labour rate variance	8,500

Table 9: Depicting the Direct labour rate variance

(Source: as created by author)

Table 8 and 9, mainly states the overall direct labour rate and efficiency variance, which might be used by the company to depict a more fruitful budget in future. Both direct labour rate and efficiency has a positive variance, which states that the budgeted rate was not adequate to support activities of the company. The increase in production led to the rise in demand for labour hours, which raised the overall direct production cost of the company. Hofstede and Shinzato (2012) stated the evaluation of direct labour hours and labour rate helps in detecting the cost reduction, which might be conducted by the company to support the overall profitability. Gabillon, Ghavamzadeh and Lazaric (2012) argued that variance in direct labour rate is viable as the overall cost mainly comes from the excess or shortage of labour available to the company.      

Fixed overhead variance spending
Particulars	Amount
Actual fixed overhead	130,000
Budget fixed overhead	128,000
Fixed overhead variance spending	2,000

Table 10: Depicting the fixed overhead variance spending

(Source: as created by author)

With the help of table 10, fixed overhead variance spending could be evaluated, which might be used in understanding the overall changes in budget assumption. Moreover, the 2000 excess amount is spend in the fixed overhead by the company, which states the rising cost incurred from the production process.  This value mainly states the rise in quantity will also raise the overall fixed cost of production. Chong and Mahama (2014) stated that determination of changes in fixed cost might mainly help companies to prepare an effective budget, which might support its future endeavours.

After the evaluation of overall budget of Orchid Ltd, the relative variance is seen rising, which might negatively affect the overall profitability of the company in the end. Moreover, the use of Zero based budgeting system might mainly help the company to reduce the overall cost and improve its profit generation capacity. The zero based budgeting system might mainly help in reducing and controlling the overly cost of the company, which in turn might help in depicting an effective budget that could support its future endeavors (Boudt, Carl and Peterson 2012).

Reference and Bibliography:

Boudt, K., Carl, P. and Peterson, B.G., 2012. Asset allocation with conditional value-at-risk budgets. Journal of Risk, 15(3), pp.39-68.

Chong, K.M. and Mahama, H., 2014. The impact of interactive and diagnostic uses of budgets on team effectiveness. Management Accounting Research, 25(3), pp.206-222.

Gabillon, V., Ghavamzadeh, M. and Lazaric, A., 2012. Best arm identification: A unified approach to fixed budget and fixed confidence. In Advances in Neural Information Processing Systems (pp. 3212-3220).

Hofstede, G.H. ed and Shinzato, T., 2012. The game of budget control. Routledge.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Lee, L.H., Pujowidianto, N.A., Li, L.W., Chen, C.H. and Yap, C.M., 2012. Approximate simulation budget allocation for selecting the best design in the presence of stochastic constraints. IEEE Transactions on Automatic Control, 57(11), pp.2940-2945.

Quan, N., Yin, J., Ng, S.H. and Lee, L.H., 2013. Simulation optimization via kriging: a sequential search using expected improvement with computing budget constraints. Iie Transactions, 45(7), pp.763-780.

Works–Land, C., 2015. The current year to date budget variance is mainly due to a large land purchase that has occurred earlier than expected when the 2015/16 Budget was prepared. There is also an additional land purchase that is funded from a Development Contribution Plan, that was not expected at the time of preparing the, 16.