Week 2: Master Budget, Flexible Budgets Discussions
Flexible versus Static Budgets (graded)
Why would managers find a flexible budget superior to a static budget, anyone?
Responses
Response
Flexible
Budgets
Author
Instructor Louviere
Date/Time
9/3/2011 6:30:27 PM
Let's begin by defining a flexible budget and a static budget and describing their uses. What is a static
budget and how does a flexible budget differ from a static budget? When would each of them be useful.
What types of decisions do they support?
RE:
Flexible
Budgets
Frank Martinez
9/7/2011 10:35:29 PM
I was going through a couple of web sites online and saw a pretty good web site
in which I will post the link here as well so that if you guys want to check it out
you may do so. Flexible budget compared towards static budget is actually
known as opposite from each other.Flexible budget changes each time that it is
prepard, which basically means that it takes it's actual performance of a company
for time to lapse and be able to change (adjust) it's forecasted bugdet numbers as
well. Which in other words this means that flexible budget is more of a realistic
budget than any other types of budgets. Here is my web site refference.
http://budgetingandforecastingsoftware.org/flexible-budget-versus-staticbudget.php
RE:
Flexible
Budgets
Travis Carroll
9/7/2011 8:52:25 PM
Static budgets are a good way to keep production costs on track, and encourage
the staff in charge of purchasing to make the greatest possible effort to obtain the
required goods at the lowest possible price
A flexible budget can sometimes account for an entire company budget;
however, it is best used as part of a larger overall budget in a subsection role,
such as a variable expense account.
RE:
Flexible Samantha Lack
Budgets
9/7/2011 11:28:03 PM
Interesting about static budgets being a good way to keep production
costs on track, this can be very important in the manufacturing industry.
On one website I was able to gain some additional insight. Static
budgets are often used as a basis for evaluating sales performance,
possibly in a car industry. However this website says static budgets are
not effective for evaluating the performance of cost centers. It lists an
example where a cost center manager may be given a large static budget
and will spend less than that budget, they are then rewarded for this
effort but a larger decline in company revenues should have mandated a
larger expense reduction. Another problem would be if revenues are
higher than expected, then the managers have to spend morethan the
amounts listed in the baseline budget. This might show unfavorable
variances when in essence they are just doing what is necessary to keep
up with customer demand. So my question is, is static budgeting really a
good way to keep production costs on track? On the flip side a flexible
budget uses percetages of revenue for certain expenses, instead of the
actual fixed numbers. In my opinion at this stage it would appear that
flexible budgeting is a better method. However, that being said I need to
do more research and then I can further address the issues. Thanks for
sharing your thoughts Travis, they are helping me to think more.
http://www.accountingtools.com/questions-and-answers/what-is-aflexible-budget.html
RE:
Flexible Instructor Louviere
Budgets
9/10/2011 5:22:34 AM
Class:
How does variance analysis help in continuous improvement?
RE:
Flexible Dawn Baker
Budgets
9/10/2011 6:39:26
AM
Variance analysis will help managers to compare actual results
against what was planned. Management can study the variance to
determine inefficiencies in price, budgeting. materials, etc. For
instance, management can analyze their efficiency in the amount
of materials that are used for their products. If they determine that
they are using more materials that what was planned, they can go
back to the affected areas and determine the issue and improve the
process.
RE:
Flexible Tara Sparks
Budgets
9/10/2011 2:46:04 PM
Variance analysis can help in continuous improvement
by determining where in the process the variance is
occurring, and what is causing that variance. For
example, if a retail company plans their staffing based
on man-hours to complete certain tasks, and they
determine that they are consistently having to pay
overtime to get the tasks completed, they can conduct a
variance analysis to determine which tasks are taking
longer, and why they are taking longer. At that point
they can either adjust staffing to allow for more
personnel, or they can make adjustments into the
process of accomplishing the task, so that the
employees are able to complete the task more
efficiently.
RE:
Flexible Instructor Louviere
Budgets
9/10/2011 3:52:57
PM
Class:
Is it possible to have a flexible budget without
a static budget or vica versa?
RE:
Flexible Brandon Green
Budgets
9/10/2011 8:35:25
PM
It is possible although I imagine it
may take a different kind of
management. Having both available
has the potential to improve results by
having two different kinds of budget
to study, analyze, and compare
against rather than just the one.
However, I think one can use either or
and do just fine as I think it's just a
matter of doing things a little
differently and how one gets used to
doing things. For instance, with a
static budget I think it would kind of
be business as usual. At least that's
my impression of it. One estimates
out how much they think something
will all cost ahead of time and tries to
stay on track with that, and that could
be done by guessing or comparing
current information to existing, doing
a little math, and getting a ball park of
where your at. With a flexible budget
you kind of do the same thing, but
your doing it based off of information
as you go compared to information
that was estimated ahead of time. So,
I think each could work on their own
when implemented correctly.
RE:
Flexible Frank Martinez
Budgets
9/11/2011 11:36:17
PM
Everyone who works in a business or owns one will know or at least have an idea of
how budgeting works. I read a really good article in which explains how budgets
work in the business world, and to be honest this reminded me of a lot of the last jobs
I had on the past couple of years. It is true, everyone has a part of the budgeting
system. All businesses have a main objective, to keep getting fed, in this case the
company needs to keep eating just as we humans do, but in the business world food
for business is money, in the budgeting world as well. I use to work at a very large
home improving company that had a lot of different departments in which everyone
had their different job duties, and all dealt with the budgeting process, basically a big
budgeting business. It is amazing to see how almost everyone uses budgets and some
people do not even realize it! Now the static budget does get involved as well, in this
case it is used as a guideline, and does not constrain a company to stay with any sort
of limits. Just as the web site I was reading through mentions how a budget is
basically a tool that is always used to help make better business decisions. Here is the
web site, it talks about how using a budget to evaluate performance, and
implementing budgets.
Read more:
http://www.investopedia.com/articles/07/budgetingforcompanies.asp#ixzz1XiIa4eQM
RE:
Flexible Stephanie McGrath
Budgets
9/11/2011 8:47:05
AM
Variance analysis shows the difference between what
was planned and the actual results. An unfavorable
variance might show that there could be a quality
problem with the products. Variance analysis can help
in continuous improvement by showing management
that they need to question what is causing the variance.
If the company sold fewer products than what was
planned, management would need to determine how to
correct the issue. Exhibit 7-2, shows some possibilities
for what caused the unfavorable variance and possible
solutions to improve it (Horngren, Datar, Foster, Rajan,
& Ittner, 2009, Cost Accounting, page 230).
RE:
Flexible Dominique Fryer
Budgets
9/11/2011 8:01:15
PM
This is a very good example of variance
analysis Tara. It happens all of the time in the
workplace and the use of variable analysis
helps the company to save money simply by
better planning for the task that are finished on
the normal workday. If a company decides
not to use this analysis, they will most likely
still get everything done, but they will have a
higher budget for a task than it needs to be.
One reason for a company to do this is
because there is no way to finish the task
faster during the day. This could be because it
would cost more to hire someone else than pay
the overtime, or because they can not get
enough manpower out of what they have.
RE:
Flexible
Budgets
Richard Burger
9/7/2011 8:59:56 PM
The Static Budget: is the master budget, and is based on the planned level of
output at the start of the budget period. It is called static because it is developed
around a single planned output level.
The Flexible budget uses actual output levels in the budgeted period. The
flexible budget is prepared at the end of the period, after the actual output.
A flexible budget allows for a more indepth understanding of deviations from the
static budget.
RE:
Flexible
Budgets
Tara Sparks
9/7/2011 9:49:49 PM
A flexible budget is based on actual output, whereas a static budget is based on
the planned output of a product. A flexible budget would be used to plan the
static budget, and to determine growth or shrinkage of production. A static
budget is used when planning for projected dollars to be spent in a given area.
Both of these types of budgeting are useful in business, and provide information
and the ability to plan in advance.
RE:
Flexible
Budgets
Lisa Marie Johnson
9/7/2011 10:25:26 PM
The static budget is considered a best-case scenario as to what the actual performance
will be during the budget period. The differences between the static budget and actual
performance (flexible budget) are due to two basic causes: differences in activity level
and differences in spending.
___
Static Budgets
Used for planning purposes
Prepared at the beginning of the period
Based on one projected level of activity
Flexible Budgets
Used for control purposes
Prepared at the end of the period
“Flexed” to accommodate actual level of production
Uses cost (variable and fixed) and revenue formulas from static budget
www.harpercollege.edu/tutoring/ac102_ch8.pdf
RE:
Flexible
Budgets
Ahmed Abdelrazig
9/6/2011 9:45:58 PM
A flexible budget is a budget that is developed using budgeted revenues and
budgeted costs based on the actual output in the budget period. While a static
budget (a.k.a master budget) is based upon the level of output planned at the start
of a budget period. These two budgets have two distinct factors that differ in
each. The first factor that differentitates the two budgets is when each is
prepared; while a static budget is prepared at the beginning of a period, a flexible
budget is prepared at the end of a period. Each budget also has different basis.
The static budget based upon the actual activity figures while the static budget is
based upon estimated planned levels of output. A static budget may be more
approriate in the cases that are more fixed or steady, while a flexible budget
would be more useful in an opposite type of sitatuion where you may have many
ups and downs instead of a flatter levels of output.
RE:
Flexible
Budgets
Janet Knowlden
9/7/2011 7:54:53 AM
The static budget is your baseline budget for the period. It would establish the
goals you wish to accomplish for that period with your product sales and
revenues. It should help managers determine if the require more or less direct
labor and materials.
RE:
Flexible Frank Martinez
Budgets
9/8/2011 3:57:25 PM
Every retail store that I have worked with uses a static budget, and at the
same time have other smaller things that can reflect towards this as well.
I use to work for Sears back in the bay area, and saw how the manager
there would have a big board in the wall showing all of the sale
associate's sale numbers, protection agreement plans sold, how much
your percentage for the week/month was made and so on. Sometimes
they try to use this system so that they can motivate workers to work
harder and do their best to get the most sales they can get. And even
more if the retail store works on commission.
RE:
Flexible Instructor Louviere
Budgets
9/10/2011 5:23:28 AM
Class:
How can variance analysis be used to analyze costs in individual activity
areas?
RE:
Flexible
Budgets
Daniel Arriagada
9/5/2011 9:17:23 PM
A flexible budget is a budget that adjusts or flexes for changes in the volume of
activity. The flexible budget is more sophisticated and useful than a static
budget, which remains at one amount regardless of the volume of activity.
the flexible budget provides a better opportunity for planning and controlling
than does a static budget.
according to the book a flexible budget is a budget developed using budgeted
revenues and budgeted costs based on the actual output in the budget period. A
flexible budget is a budget that adjusts or flexes for changes in the volume of
activity, a budget that is adjusted (flexed) to recognize the actual output level
a static budget (master budget) is based on the level of output planned at the
start of the budget period. The master budget is called a static budget because the
budge for the period is developed around a single (static) planned output level.
The flexible budget differs from the master budget because is more sophisticated
and useful than a static budget, which remains at one amount (single planned
output level) regardless of the volume of activity. the flexible budget provides a
better opportunity for planning and controlling than does a static budget for
example if you are producing more products the flexible budget would be
increased in materials, labor and so on, whether on the static budget it won't. A
flexible budget assumes that all costs to produce a product or service are either
completely variable or completed fixed with respect to the number of products or
services produced.
RE:
Flexible
Budgets
Freddy Rodriguez
9/6/2011 1:52:59 PM
A static budget also called a master budget, is a type of budget that incorporates the output
planned at the start of the budget period, the numbers from the static budget are sometimes
different from the actual results. A static budget is useful for planning and control.
A flexible budget is one way company’s deals with different levels of activities it provides
budgeted data for different levels of activity as to static budget it is geared toward one level of
activity. The flexible budget responds to changes in activity and a better tool for performance
evaluation.
http://www.principlesofaccounting.com/chapter%2022.htm
RE:
Flexible Janet Knowlden
Budgets
9/7/2011 7:58:17 AM
Freddie, this is an excellent link. I have this bookmarked from previous
accounting classes to help me understand the lessons. They have a way
of explaining the concepts that is easier to understand.
RE:
Flexible Instructor Louviere
Budgets
9/7/2011 5:25:00 PM
Hi Ahmed, Janet, Daniel, Freddy, Janet, and Class:
What are some additional considerations that arise when budgeting in
mulitinational companies?
RE:
Flexible Frank Martinez
Budgets
9/9/2011 10:24:47 PM
One external factor is that sometimes it can become
complicated to do global business. For example,
interest rates, foreign currency exchange rates, and
inflation are actually one of the biggest external factors
that can have effect on multinationals along with their
markets. I was reading an article online that was talking
about how there are variables that are interrelated. In
this article it gives us a good example. It mentions how
very high inflation can drive specific countries to value
its currency down. Thanks to this it can cause an impact
to exchange rates. Which is something that can affect
the budgeting process. Here is my web site resource,
pretty interesting stuff.
http://www.allbusiness.com/accounting/budget/1716781.html#ixzz1XWIVvk8S
RE:
Flexible Tara Sparks
Budgets
9/9/2011 10:43:05 PM
When budgeting in multinational companies it is
important to keep exchange rates, resource price
differences and legal costs in mind. It is also important
to keep in mind the political situations, and be
financially prepared to take action as needed should
situations in other countries change with very little
notice. This has been shown quite dramatically over
the last year with all of the unrest in the middle east,
even in countries like Egypt which were largely
considered to be stable.
RE:
Flexible Richard Burger
Budgets
9/11/2011 9:24:51 PM
Some considerations are:
- Revenues and expenses occur in many different
currencies, and have to be translated in to a single
currency.
- Management needs to budget for currency exchange
rates.
- The need to understand political, legal, and economic
environments of the different countries in which they
operate.
Rich
RE:
Flexible Daniel Arriagada
Budgets
9/7/2011 7:57:48 PM
The additional consideration is the currency rate of the
countries they are in. So you must budget for foreign
exchange rates, and this budget is very hard to
accomplish because of the constant international
currency changes.
RE:
Flexible Ahmed Abdelrazig
Budgets
9/8/2011 10:20:41
PM
Daniel - foreign currency is definately a major
consideration and it is a variable factor as you
stated like many of the factors I mentioned in
my post. In fact, inflation and foreign
exchange rates somewhat go hand in hand.
RE:
Flexible Instructor Louviere
Budgets
9/10/2011 5:24:29
AM
Class:
Discuss benchmarking. What is it and how
should we use it?
RE:
Flexible Richard Burger
Budgets
9/10/2011 6:48:00
PM
Benchmarking is a
systematic process for
identifying and implementing
"Best practices."
Organizations gather data
from other organizations
doing the same or similar
work, they use this data to
gauge how their own
organization is doing
compared to competitors.
The information is used to
improve processes that are
shown to be lacking,
instituting the "best
practices" that other
organizations have already
been using, and to improve
the organizations
competitiveness.
Rich
RE:
Flexible Lisa Marie Johnson
Budgets
9/10/2011
10:25:58 PM
Benchmarking is the
continuous process of
comparing the levels of
performance in producing
products and services and
executing activities against
the best levels of
performance in competing
companies or in companies
having similar processes.
When benchmarking is used,
it’s to establish standards
that can be used so that the
company will be competitive
in the marketplace. Basically
companies use
benchmarking to make sure
they are competitive with
other companies that provide
the same products or
services. Companies
develop benchmarks and
calculate variances to track
what is most important to
their business.
RE:
Flexible Freddy Rodriguez
Budgets
9/9/2011 5:04:22 PM
There are a few budgeting consideration for multinational
companies: doing business in a less familiar business
environment, for example budgeting in different currency and
different exchange rate. Also to consider is political, legal, and
economic environment for the different counties it operates in.
Thus making it difficult for multinational companies to budget,
but there is hope, according to our text, “The purpose of budgeting
in such environments is not to evaluate performance relative to
budgets—a meaningless comparison when conditions are so
volatile. Instead, the goal of budgeting is to help managers
throughout the organization to learn and to adapt their plans to the
changing conditions and to communicate and coordinate the
actions that need to be taken throughout the company.” (Cost
Accounting, 13th Edition. Pearson Learning Solutions p. 201).
RE:
Flexible Travis Carroll
Budgets
9/9/2011 8:00:15 PM
The process of budgeting for multinational company is quite
complex in comparison to budgeting for domestic or national
company. There are numerous additional factors which need to be
considered, such as:
1. Foreign exchange rates that causes effect in multinational’s
operation. There are numerous transactions which are being done
in cross border currencies.
2. Inflation rates prevailing in various economies wherever a
particular multinational company operates because they have to
make the necessary adjustments in their financials accordingly.
3. Interest rates prevailing in the different markets which causes
affects in the debt component as well as other transactions that
company deals with.
4. Government policies and political risks also play crucial roles
in the process of budgeting & forecasting. Every company wants
the conducive & friendly environment to run their operations
smoothly.
5. Security measures & the friendly environment being
provided by the economies. For example recent bomb blasts in
Mumbai (the commercial capital of India) would definitely affect
the operations of numerous companies. Similarly, 9/11 attack on
WTC also affected the operations of numerous multinational
companies.
RE:
Flexible Ahmed Abdelrazig
Budgets
9/8/2011 10:11:11 PM
There are a few major consideration when it comes to
budgeting for global companies. The biggest
consideration may revolve around interests rates and
inflation in foreign countries.
A worldwide organization will surely have a vast array
of inflation and interest rate situations to deal with
making budgeting just that much harder. Another
major consideration is how certain pricing policies and
transaction procedures are run and setup in foreign
countries. Thee fees and costs of these two areas can
pile up and should not be overlooked.
RE:
Flexible Instructor Louviere
Budgets
9/10/2011 5:25:14
AM
Next Question:
How do managers plan for variable overhead costs?
RE:
Flexible Samantha Lack
Budgets
9/10/2011 10:35:09
PM
In order for managers to properly plan for
variable overhead costs they need to
eliminate the activities that do not add value
to the product or service. In accomplishing
this task, managers can focus their attention
on activites that make a superior product or
service for customers. (Horngren, Datar,
Foster, Rajan, & Ittner, 2009) In many ways I
would imagine this is a task that should occur
in most areas of planning. It would make
projects as a whole more cost effective. I am
trying to think of a particular example but am
having trouble. I suppose one example might
be if a company was producing plumbing
parts that were going to be placed recessed in
a wall of a house or business, choosing to
prime or paint those parts might seem
esthetically pleasing but there is no real
purpose served in doing so. In fact, this added
step may cost more in labor hours and
materials (paint) but does not add any real
value to the product itself. This would be a
situation where a manager would be best
served in eliminating this step.
Works Cited:
Horngren, C. T., Datar, S. M., Foster, G.,
Rajan, M., & Ittner, C. (2009). Cost
Accounting-A Managerial Emphasis.
Upper Saddle River: Pearson Prentice
Hall.
RE:
Flexible Alvin Larkins
Budgets
9/11/2011 5:57:42
PM
Managers plan for overhead cost by
finding out what works and what
doesn't. The example the text gives is
Webb's jackets. Webb's maagers
have determined that sewing is a
prime reason that customers buy their
jackets. Sospnding money on
maintenanc of the sewing mashines is
ok to do, rather than wait for the
machines to break.
RE:
Flexible
Budgets
Tyrone Labad
9/5/2011 3:34:58 PM
A manager needs to decide which budget to put in place that will provide benefits
for the company in the long run. Flexible budgets are flexible, in other words, it
changes while static does not change. Managers can make changes to a flexible
budget in the middle of a reporting period whereas static budgets are usually
planned in advance. A static budget is prepared based on assumptions or guess
about future actual activity whereas flexible budget is prepared based on the
actual output. Static Budget is useful for variance analysis. It indicates to
managers how much cost was over or under the budget. Flexible budget provides
a better level of control; since it focuses on volume management can control
costs that can be flexible.
RE:
Flexible
Budgets
Ellen LaChance
9/4/2011 7:19:34 AM
A flexible budget is a budget that is prepared at the end of a given period and is based
on the actual ouput of activity, but it also flexes for change in the level of activity.
Taking into account the output in a given period, the flexicle budget will calculate
budgeted revenues and budgeted costs. It can be used as a performance or
analysis tool. The static budget is developed based on the level of output planned at
the start of a given period. It can be used more as a projection tool to to estimate
expenses.
The differences between a flexible and static budget are the time of the cycle they are
prepared, flexible at the end of the period, and static at the start of the period. The
flexible budget is based on actual activity and the static is based on planned activity.
The flexible budget would give a more in-depth evaluation of the differences from the
static budget. The static budget will show the variances in the activity level or costs for
materials.
RE:
Flexible Kanchi Patel
Budgets
9/4/2011 3:12:03 PM
Good post Ellen. Flexible budgets are one way companies deal with
different levels of activity. A flexible budget provides budgeted data for
different levels of activity. Another way of thinking of a flexible budget
is a number of static budgets. For example, a restaurant may serve 100,
150, or 300 customers an evening. If a budget is prepared assuming 100
customers will be served, how will the managers be evaluated if 300
customers are served? Similar scenarios exist with merchandizing and
manufacturing companies. To effectively evaluate the restaurant's
performance in controlling costs, management must use a budget
prepared for the actual level of activity. This does not mean
management ignores differences in sales level, or customers eating in a
restaurant, because those differences and the management actions that
caused them need to be evaluated, too.
RE:
Flexible Stephanie McGrath
Budgets
9/5/2011 11:37:42 AM
Puzzler #1 in the lecture tells me the difference is the static budget is
prepared for the planned output and the flexible budget is prepared based on
the actual output. A static budget would be useful during the budgeting
phase at the end of one year, while planning for the next. The flexible budget
would be useful when the company is preparing their end of year financial
statements; to show the actual revenue and expenses. These budgets support
the decision of variable and fixed costs, and what direct materials and labor
to plan for.
RE:
Flexible Tyrone Labad
Budgets
9/5/2011 3:42:34 PM
Personally, I think static budget would work at a disadvantage for
a new company. What do you think? Flexible budgets are based
on actual output whereas static is not.
RE:
Flexible Instructor Louviere
Budgets
9/5/2011 5:28:56
PM
Excellent start!
Now, let's define a rolling budget and give some
examples.
RE:
Flexible Craig Bemis
Budgets
9/5/2011 6:59:02
PM
A rolling budget allows management
to always have the same time period
worth of a budget at all times. This
could be for a year, quarter, and in
some cases, a five year period. The
way it works, in a one year example,
is each time a month passes for the
current year, a month of the following
year is added. For example, in Feb.
of 2011, the budget would reflect a
time period of Feb.2011-Jan.2012. In
March 2011, the budget will reflect
March 2011-Feb, 2012, and so on.
If I'm understanding correctly, a
rolling budget would give a company
more flexibility. For example, if the
budget were short one month, the
rolling budget would help compensate
by allowing money to be pulled from
a month where there is an excess of
money. This would be okay because
technically, the budget never ends
because there is not end of year.
RE:
Flexible Thomas Carter
Budgets
9/6/2011 5:10:51
AM
Budget or plan that is always
available for a specified future period
by adding a period (month, quarter or
year) to the period that just ended.
Also called continuous budget.
RE:
Flexible Elena Brechler
Budgets
9/6/2011 11:59:44
AM
A rolling budget is when a future
period is created as soon as the same
period ends. For example, if the first
quarter of the year just ended, I will
go ahead and create the first quarter
budget of next year.
RE:
Flexible Patricia Neal-Williams
Budgets
9/6/2011 4:54:18
PM
A rolling budget is also known as a
continuous budget, a perpetual budget,
or a rolling horizon budget. A rolling
budget is method in which a budget
established at the beginning of an
accounting period is continually
amended to reflect variances that arise
due to changing circumstances
Let’s assume that a company’s
accounting year ends on each
December 31. Prior to the start of the
year 2011, the company prepares its
annual budget which is detailed by
month for January through December
2011. This budget could become a
rolling budget if after January 2011 the
company drops the budget for January
2011 and adds the budget for January
2012. This rolling budget now covers
the one year, or 12-month, period of
February 1, 2011 through January 31,
2012. At the end of February 2011, the
rolling budget will drop February 2011
and will add February 2012. At this
point the rolling budget will cover the
one year period of March 1, 2011
through February 29, 2012
http://blog.accountingcoach.com/whatis-a-rolling-budget/
RE:
Flexible Instructor Louviere
Budgets
9/6/2011 5:52:15
PM
Modified:9/6/2011 5:56 PM
Hi Craig, Thomas, Elena, Patricia,
and Class:
Excellent discussions!
Another question: How can
sensitivity analysis be used to
increase the benefits of budgeting?
RE:
Flexible Deborah Kieffer
Budgets
9/9/2011
10:34:59 PM
Since we've already seen some
excellent explanations of sensitivity
analysis, how and why it is used, and
some of the tools available to easily
calculate results, I thought I would
provide an example of an actual (?)
analysis (see below). Please follow
this link:
http://businessplanhut.com/whatsensitivity-analysis-example-andcomponents-involved for more
information on how to structure an
analysis and the steps to set-up and
develop an analysis.
Below provides an example of a
sensitivity analysis.
RESUME SERVICES
FORECASTED SENSITIVITY ANALYSIS
FOR YEAR ENDING DECEMBER 31, 200X
15%
10%
200X
10%
Decline Decline Original
Incline
in Sales in Sales Forecasted in Sales
Figures
Sales
$88,400 $93,600
$104,000 $114,400
Cost of Goods
Sold
$10,200 $10,800
$ 12,000 $ 13,200
GROSS
PROFIT
$78,200 $82,800
$ 92,000 $101,200
OPERATING EXPENSES:
Marketing Expenses:
Promotional
Pamphlet
Expense
$ 4,000
$4,000
$4,000
$ 4,000
University
Advertising
Expense
$ 8,000
$8,000
$8,000
$ 8,000
Newspaper
Advertising
Expense
$25,998 $25,998
$25,998
$25,998
Total
Marketing
Expenses
$37,998 $37,998
$37,998
$37,998
$15,600
$15,600
Administrative Expenses:
Office Salaries
Expense
$15,600 $15,600
Employer Costs
(11% of Salary)
$1,716
$1,716
$1,716
$1,716
Office Supplies
Expense
$2,500
$2,500
$2,500
$2,500
Business Cards,
etc. Expense
$ 250
$ 250
$ 250
$ 250
Printing of
Checks
Expense
$ 75
$ 75
$ 75
$ 75
Telephone
Expense
$1,200
$1,200
$1,200
$1,200
Business
Registration
Expense
$1,200
$1,200
$1,200
$1,200
Message Centre
Expense
$4,600
$4,600
$4,600
$4,600
Toll Free
Services
Expense
$9,600
$9,600
$9,600
$9,600
Credit Card
Service
Expense
$4,992
$4,992
$4,992
$4,922
Bank Charges
Expense
$ 240
$ 240
$ 240
$ 240
Miscellaneous
Expenses
$1,800
$1,800
$1,800
$1,800
Depreciation
Expense, Auto
$1,000
$1,000
$1,000
$1,000
Depreciation
Expense,
Equipment
$1,400
$1,400
$1,400
$1,400
Total
$46,173 $46,173
Administrative
Expenses
$46,173
$46,173
TOTAL
OPERATING
EXPENSES
$84,171 $84,171
$84,171
$84,171
INCOME
BEFORE
TAXES
$(5,971) $(1,371)
$7,829
$17,029
RE:
Flexible Tyrone Labad
Budgets
9/6/2011 8:18:29
PM
Sensitivity analysis is a
“what-if” technique that
examines how results
will change if the
original predicted data
are not achieved or if an
underlying assumption
changes. Managers use
financial planning
models, that examine the
financial impact of one
or more parameters that
influence a master
budget. The financial
model in turn presents a
master budget based on
the changes and
demonstrates the
financial impact on the
original data. These
predictions help to make
contingency plans,
change strategies or
update the budget as
conditions change.
RE:
Flexible Patricia Neal-Williams
Budgets
9/7/2011 1:56:06
PM
Sensitivity Analysis
can be used to
measure how
changes to a project
affect their outcome.
Sensitivity analysis
is used to determine
the change in Net
Present Value given
a change in a
specific variable,
such as estimated
project revenues. So,
along with budgeting
it will help you get a
better understanding
of profit and losses
by changing the
variables to see
which aspect will
give you a better
outcome.
RE:
Flexible Stephanie McGrath
Budgets
9/7/2011
7:11:55 PM
You both give
great
definition on
the effect of
sensitivity
analysis. In
general, by
preparing a
budget we are
predicting
what income
and expenses
we will have
in a given
time. The
benefit of
budgeting is
that it prepares
us for the upcoming year,
and provides a
goal to achieve
the greatest
return.
Sensitivity
analysis can
increase this
benefit
because it
results in how
changes in
costs or sales
will affect the
overall
revenue, again
helping predict
the budget. An
increase in
selling cost
would increase
revenue, so
long as there
were no
change in
purchasing
costs.
RE:
Flexible Instructor Louviere
Budgets
9/10/2011
5:26:37 AM
Excellent
discussion!
How does
the planning
for fixed
overhead
costs differs
from the
planning of
variable
overhead
costs?
RE:
Flexible Janet Knowlden
Budgets
9/7/2011 8:07:19
AM
A rolling budget is also called a
continuous budget because it is
always available for a specified
period. It is created by continually
adding a month, quarter or year to the
period that just ended. This type of
budget forces managers to think about
the next month, quarter or year to
keep them looking ahead.
RE:
Flexible Daniel Arriagada
Budgets
9/7/2011 8:14:51
PM
A rolling budget is a forward looking
budget. Its constantly looking n-
periods into the future.
Rolling budgets are being adopted
because it forces us to constantly look
to the future and revise our estimates.
The failure of traditional fiscal year
budgeting is that as we progress
through the fiscal year the number of
periods in the budget decrease and
make it harder to assess future
prospects of the company.
example some companies will plan a
budget monthly for the year 2011,
January through December. With a
rolling budget as soon as January
2011 is over the budget will be for
February 2011 through January 2012.
A rolling budget forever keeps the
budget at 12 months. A rolling budget
does not have to follow month to
month either. It can roll every quarter
if a business works that way. The
traditional budget that just lasted for a
fiscal year, January through
December, did not allow a business to
look further into the future and plan
accordingly. A business manager
should always have an eye into the
future and rolling budgets will keep
that going.
RE:
Flexible Dawn Baker
Budgets
9/7/2011 4:46:15
PM
A rolling budget is defined as a budget that is
always available for a specified future
period. It is created by adding months,
quarters or years to the period that ended. The
budget is created at the beginning of the
period, and will be continuously updated to
reflect any variances that arise due to
changing circumstances. The advantage of
this type of budget is that the company's
management has a budget that looks
forward for a specified period of time.
RE:
Flexible Instructor Louviere
Budgets
9/7/2011 5:33:52
PM
Hi Tyronne, Patricia, Janet,
Dawn, and Class:
What is the relationship between
management by exception and
variance analysis?
RE:
Flexible Kanchi Patel
Budgets
9/8/2011 5:00:52
PM
Variance analysis and
performance reports are
important elements of
management by
exception. Simply put,
management by
exception means that the
manager's attention
should be directed
toward those parts of the
organization where plans
are not working out for
reason or another. Time
and effort should not be
wasted focusing on those
parts of the organization
where things are going
smoothly.
RE:
Flexible Tara Sparks
Budgets
9/11/2011
5:18:50 PM
Variance analysis
provides the data to
determine which
areas need to be
focused on, and
managed by
exception. By
performing the
variance analysis
problem areas are
identified, and
management at that
time is able to direct
its efforts to the
problem areas, rather
than focusing time
and energy on the
areas which are
already performing
to expectations.
RE:
Flexible Ellen LaChance
Budgets
9/9/2011 1:54:31
PM
A rolling budget as indicated in our glossary
is a budget or plan that is always available for
a specified future period by adding a period
9month, quarter or year) to the period that
just ended. It is also called a continuous
budget. The rolling budget is a great tool for
management to use in future planning and to
identify areas where changes may need to be
made. Having a rolling budget allows you to
see the budget for the next 12 months or
whatever period is identified. The rolling
budget is continuously being extended, if you
create a 12-month budget beginning in
January 2011 and ending in December 2011,
when you reach February 2011 (January has
ended), the budget rolls forward to include
January 2012. The advantage to this type of
budget is someone is constantly reviewing the
budget to revise for the added months. A
disadvantage to this type of budget is the
budget months that are added on are not
necessarily revised for changes in the
budgeted amounts.
RE:
Flexible Travis Carroll
Budgets
9/10/2011 3:55:12
PM
Rolling Budget is basically a technique where
a budget which is initially established when
the accounting period was about to begin, is
amended on a continuous basis so that the
variances which have been observed due to
the changes in circumstances can be
adequately reflected. This type of budget
takes into consideration the variances
occurred during the budget period. It is a
forward looking approach and a continuous
activity
which
involves
constant
consideration of n number of future periods
and calls for constant amendment wherever
the variances from set standards are observed.
Rolling budgets are preferred as it focuses on
constantly looking to the future and revising
the estimates set before. the failure of
traditional fiscal year budgeting is one of the
reason which has led to the development of
rolling budget as the former makes it difficult
to evaluate the future pros[entity of a
company. For example, we developed a
budget for the period 1st of April 2004 to 31st
of March 2005. Now when we come to 1 st of
May 2004 we will drop out the plan for April
2004 and develop a new one for April 2005
and the new budget cycle will be from 1 st of
May 2004 to 30th April 2005.
RE:
Flexible Instructor Louviere
Budgets
9/11/2011 1:55:11
PM
Class:
Good discussions!
Describe how the flexible budget
variance analysis can be used in the
control of costs of activity areas.
RE:
Flexible
Budgets
Patricia Neal-Williams
9/4/2011 3:49:11 PM
A flexible budget is a budget that adjusts or flexes for changes in the
volume of activity.
A static budget is a budget that does not change as volume changes
Static budget, the most common type of budget, projects a fixed level of
expected input, output, costs of production, and net income before the
start of the budgeting period. The values specified in static budgets very
often vary from the actual results derived at the end of the budget period.
Flexible budget also known as variable or dynamic budget recognizes the
fact that per unit fixed and variable production costs change based on the
level of output, and as such change line values in accordance with
fluctuations in output.
RE:
Flexible Jason Hall
Budgets
9/5/2011 4:00:41 AM
All of the answers are great and what I can see why managers find a flexible budget
superior to a static budget is that the flexible budget is more realistic in that it
accounted for all activity completed as opposed to the planned static budget.
RE:
Flexible
Budgets
Craig Bemis
9/4/2011 7:35:04 PM
A static budget is a budget that a company starts with to use as a master budget.
The static budget consists of numbers that are based on the company's planned
outputs and inputs for each division of the company. A static budget consists of
projected amounts of which a company plans to stay within the limits. Managers
use economic forecasting to come up with a realistic static budget.
A flexible budget is used at the end of a period and is based off actual numbers.
It is used to determine if the company stayed within the limits of the static
budget. The flexible budget consists of variable and fixed costs. The variable
costs will help the company determine the output (sales) for the period, while the
fixed costs rarely deviate from the static budget.
Static vs
flexible
budget
Alvin Larkins
9/5/2011 8:00:22 AM
A static budget is based off of what was planned and not what actually happened with the output. A
flexible budget is based off of what the actual output was. A manager would find the flexible budget better
than the static budget because planning is made a lot easier with the flexible budget. With price variance
adjusting the output costs, a flexible budget makes it easier to account for the price variance.
RE:
Static vs
flexible Kanchi Patel
budget
9/5/2011 12:44:08 PM
Good post and I totally agree with you Alvin. Flexible budget is the opposite of
Static Budget. It is changed each time it is prepared. It basically takes in the
actual performance of the company for time lapsed and adjust the forecasted
budgeted numbers in accordingly. This makes Flexible Budget a more realistic
budget than any other budgets. Many companies also add in the actual versus
variance analysis in the Flexible Budget. These analysis formed a basis for the
companies to forecast result for the coming financial year end. Its formats and
presentations are very similar to the Master Budget. But the volume of details
may be much lesser. Flexible Budget is a very useful management tool. It helps
the companies to evaluate its current performance against the Master Budget. If
they are falling behind, quick actions and new strategies could be implement to
ensure that they still achieved their targets when the financial year ended. If the
companies’ performances are ahead of the Master Budget, they can expect a
better than expected results when the financial year ended. Usually this would
mean good bonuses or increments are waiting in line for them.
RE:
Static
vs
Instructor Louviere
flexible
budget
9/5/2011 5:31:07 PM
Modified:9/6/2011 5:57 PM
Hello Patricia, Jason, Craig, Alvin, Kanchi, and Class:
Another question: Outline the steps in preparing an operating budget.
Is there a
sequence that you would follow?
RE:
Static
vs
Alvin Larkins
flexible
budget
9/10/2011 6:16:09 AM
On page 229 in the text it list the steps for a fixed budget as:
Step 1: Identify the Actual Quantity of Output.
Identify the actual quantity sold and produced.
Step 2: Calculate the Flexible Budget for Revenues Based on Budgeted
Selling Price and Actual Quantity of Output.
Use formula Flexible _ budget revenues=Selling price*quantity
Step 3: Calculate the Flexible Budget for Costs Based on Budgeted Variable
Cost per Output Unit, Actual Quantity of Output, and Budgeted Fixed Costs.
Enter the variable cost and fixed costs based on the output, and find
a total cost
RE:
Static
vs
Instructor Louviere
flexible
budget
9/10/2011 3:58:20 PM
Class:
A quick word (or two) concerning budgeting.This is also known as financial planning. In all aspects, the future
is uncertain, but with rationale assumptions and reasonable
expectations an effective financial plan is possible. The alternative
to this is luck and or chaos. Based upon experience, I think most
of us would choose to avoid the alternative.
A budget is usually done for the entire organization. It also
forward-looking, goal-oriented and ties to meeting realistic
performance targets.
Finally, it all begins with sales.
RE:
Static
vs
Ellen LaChance
flexible
budget
9/6/2011 4:54:27 PM
Yes, there is a sequence you should follow in preparing an
operating budget. Below are the steps to be taken:





Identify the problem and uncertainties
Obtain information
Make predictions about the future
Make decisions by choosing among alternatives
Implement the decision, evaluate performance, and
learn
RE:
Static
vs
Samantha Lack
flexible
budget
9/11/2011 11:48:17
PM
Great info on preparing and operating budget. In
developing the budgeted fixed overhead rate we need
to take the appropriate steps also.
1.Choose the period to use for the budget
2.Select the cost allocation bases to usein allocating
fixed overhead costs to output produced
3.Indentify the fixed overhead costs associated with
each cost allocation base
4.Compute the rate per unit of each cost allocation base
used to allocate fixed overhead costs to output
produced
It would appear that this is my big issue with many of
these problems, I am not appropriately breaking down
the steps into smaller pieces and this seems key in cost
accounting'
RE:
Static
vs
Deyanira Barbosa
flexible
budget
9/6/2011 2:51:17 PM
www.ehow.com lists the following steps in preparing an operating
budget
Prepare a sales budget; which includes revenue generating
activities.
1.
2
Prepare a cost budget; which is a projection of all expenses
the business will incur. This is split into two sections, revenue
and fixed costs.
2.
3. Take projected revenue from the sales budget. Subtract the
cost of producing revenue from the cost budget. This sum
equals the gross profit. Next, subtract fixed costs. Then,
subtract financial costs such as interest and depreciation. The
final sum equals the projected income
RE:
Static
vs
Thomas Carter
flexible
budget
9/6/2011 5:16:43 AM
The steps in developing an Operating Budget;
1) Prepare the Revenues budget.
2) Prepare the Production budget. (in units).
3) Prepare the Direct Material Usage budget and Direct
Material Purchases budget.
4) Prepare the Direct Manufacturing Labor Costs budget.
5) Prepare the Manufactring Overhead Costs budget.
6) Prepare the Ending Inventories Budget.
7) Prepare the Costs of Goods Sold budget.
8) Prepare the Nonmanufacturing Costs Budget.
9) Prepare the Budgeted Income Statement.
RE:
Static
vs
Craig Bemis
flexible
budget
9/6/2011 5:01:58 PM
The operating budget provides an overview of the costs
of running a business. It gives an overview of the
company's day to day expenses and income. I found
this website that gives this formula (structure) for an
operating budget:
Sales/turnover
- Variable costs/used goods
= Gross profit
-Fixed costs
-Depreciation
-Interests
=Profit
Sales tax is not part of the calculation for the operating
budget. It is figured separately.
http://www.dynamicbusinessplan.com/operatingbudget/
RE:
Static
vs
Tyrone Labad
flexible
budget
9/5/2011 7:19:54 PM
The operating Budget comprises a number of different budgets. To prepare
the operating budget first prepare the Revenue Budget, then the Production
budget, then Direct Materials Usage & Direct Materials purchased budget,
then Direct Manufacturing Labor cost Budget, then Manufacturing
Overhead Budget, Ending Inventory Budget, Cost of Goods sold Budget,
non Manufacturing Budget and finally the Income statement Budget. It
seems that the sequence to prepare this budget is some what the format of an
Income Statement. So being a little familiar, with preparing an Income
statement I would use that knowledge for that sequence.
RE:
Static
vs
Instructor Louviere
flexible
budget
9/6/2011 5:54:12 PM
Modified:9/6/2011 5:59 PM
Hi Ellen, Deyanira, Thomas, Craig, Tyrone, and Class:
Discuss how nonoutput-based cost drivers can be incorporated
into budgeting.
RE:
Static
vs
Patricia Neal-Williams
flexible
budget
9/7/2011 2:13:37
PM
Kaizen budgeting explicitly incorporates
continuous improvement anticipated during
that budget period into the budgeted numbers.
Many companies that have cost reduction as a
strategic focus use kaizen budgeting to
continuously reduce costs. Non-output-based
cost drivers can be incorporated into
budgeting by the use of an activity-based
budgeting system. Activity based budgeting
focuses on the budgeted cost of activities
necessary to produce and sell products and
services. Non-output-based cost drivers, such
as the number of part numbers, number of
batches, and number of new products can be
used with ABB.
RE:
Static
Freddy Rodriguez
9/7/2011 4:46:35
PM
vs
flexible
budget
For non-output-based cost drivers they can be
incorporated into budgeting by using ABB. ABB can
provide you with a greater detail by requiring you to
establish all activities that incur cost in all functions and
then define the relationship between those activities,
especially regarding overheads, because it permits the
identification of value-adding activities and their cost
drivers.
My understanding of Activity-based budgeting is that it
is easier to understand, compares what you did spent
with what you should have spent and more accountable.
RE:
Static
vs
Thomas Carter
flexible
budget
9/7/2011 5:40:14
PM
Nonoutput-based cost drivers can be
incorporated into budgeting by the use of
activity-based budgeting (ABB). ABB focuses
on the budgeted cost of activities necessary to
produce and sell products and services.
Nonoutput-based cost drivers, such as the
number of part numbers, number of batches,
and number of new products can be used with
ABB.
RE:
Static
vs
Kanchi Patel
flexible
budget
9/6/2011 6:20:52
PM
Nonoutput-based cost drivers can be
incorporated into budgeting by the use of
activity-based budgeting (ABB). ABB focuses
on the budgeted cost of activities necessary to
produce and sell products and services.
Nonoutput-based cost drivers, such as the
number of part numbers, number of batches,
and number of new products can be used with
ABB.
RE:
Static
vs
Instructor Louviere
flexible
budget
9/7/2011 5:37:08
PM
Hi Patricia, Freddy, Kanchi, and
Class:
Distinguish between a favorable variance and
an unfavorable variance. Compare and
contrast several variances.
RE:
Static
vs
Dawn Baker
flexible
budget
9/8/2011 5:51:52
PM
A favorable variance means that
the actual costs are less than the
standard costs and will tell
management that if everything
remains constant, the company's
profit will exceed what was
planned. If the variance is
unfavorable, the actual costs are
greater than the standard costs and
the company's actual profit will be
less than planned. It is important to
recognize variances immediately,
so management is able to plan for
the difference between the planned
budget.
RE:
Static
vs
Deborah Kieffer
flexible
budget
9/7/2011
11:42:45 PM
The information I found at this link
compares and discusses several different
types of variances such as materials price
variance, the labor rate variance, the
manufacturing overhead spending and
budget variances, and the production
volume variance and also discusses when
certain variances may not be an indicator of
an operating efficiency:
http://blog.accountingcoach.com/efficiencyvariance/
A favorable budget variance indicates that
an actual result is better for the company (or
other organization) than the amount that
was budgeted. Some examples of favorable
budget variances are:
1. Actual revenues are more than the
budgeted or planned revenues.
2. Actual expenses are less than the budget
or plan.
3. Actual manufacturing costs are less than
the amount budgeted for the period.
Conversely, unfavorable budget variances
would show a negative impact on the
company.
For instance: An unfavorable volume
variance indicates that the amount of fixed
manufacturing overhead costs applied (or
assigned) to the manufacturer’s output was
less than the budgeted or planned amount
of fixed manufacturing overhead costs for
the same time period. The unfavorable
volume variance indicates that period’s
output was less than the planned output.
RE:
Static
vs
Patricia Neal-Williams
flexible
budget
9/9/2011
12:50:42 AM
I will use this as an exmple;
say that I my actual budget
cost for packaging was
12,000 and my static or
flexible budget cost were
13,000, that would be a
favorable variance because
my actual costs were less
than what was budgeted. If it
were the other way around,
then it would be unfavorable
variance because my costs
exceeded the actual budget
RE:
Static
vs
Thomas Carter
flexible
budget
9/9/2011 8:51:44
AM
when calculating variances if the actual amount (cost or expense) is less than what was budgeted is usually
considered "favorable." Unfavorable is when the cost or espense is more than what was budgeted.
Flexible-Budget
Actual
Variances
Results (1)
(2) = (1) - (3)
Sales-Volume
Flexible
Variances
Budget (3)
(4) = (3) -(5)
Units Sold
10,000
0
10,000
-2,000
U
Revenues
$1,250,000
$50,000
F
$1,200,000
-$240,000
U
Variable Costs
Direct Materials
$621,600
$21,600
U
$600,000
-$120,000
F
Direct Manufacturing Labor
$198,000
$38,000
U
$160,000
-$32,000
F
Variable Manufacturing Overhead
$130,500
$10,500
U
$120,000
-$24,000
F
Total Variable Costs
$950,100
$70,100
U
$880,000
-$176,000
F
Contribution Margin
$299,900
-$20,100
U
$320,000
-$64,000
U
Fixed Manufacturing Costs
$285,000
$9,000
U
$276,000
$0
Operating Income
$14,900
-$29,100
RE:
Static
vs
Janet Knowlden
flexible
budget
U
$44,000
-$64,000
9/9/2011 9:44:16
AM
A favorable variance does
not always mean a good
thing, just as an unfavorable
variance does not always
mean a bad thing. For each
variance, favorable or
unfavorable, you have to
look at the cause of the
variance and determine if it is
the result of something
controllable. Variance
analysis is useful for
performance evaluation and
for seeking targets but can
undermine process
improvements to avoid an
unfavorable variance.
RE:
Static
vs
Jason Hall
flexible
budget
9/10/2011
4:00:53 PM
Since a favorable
variance is simply excess
amount of a standard or
budgeted amount over
the actual amount
incurred having a
favorable variance may
simply indicate the
budget was not planned
well.
U
RE:
Static
vs
Daniel Arriagada
flexible
budget
9/9/2011 9:01:55
PM
I agree with you an
unfavorable variance
could mean that a
price in material
went up and there is
nothing management
can do to avoid that.
same thing applies
for favorable
variances, maybe a
price in materials
went down because
of global
competition.
RE:
Static
vs
Instructor Louviere
flexible
budget
9/10/2011
5:27:55 AM
Everyone:
How does
standard
costing differ
from actual
costing?
RE:
Static
vs
Ahmed Abdelrazig
flexible
budget
9/10/2011
11:24:04 PM
Actual
costing
and
standard
costing
differ
primarily
in what
each of
their
costs are
related
to. In
regards to
the actual
costing
system,
the direct
costs are
related
back to
the cost
of the
product.
While on
the other
hand, the
standard
costing
system
takes the
direct
costs and
related
them
back to
the
amount
produced.
Actual
costing,
is
basically
as its
same
states, the
actual
precise
costs
while the
standard
costing is
a much
simpler
method
of
assigning
costs
based on
preset
figures in
many
cases.
RE:
Static
vs
Elena Brechler
flexible
budget
9/10/2011
7:37:49 PM
Standard Cost-This values manufactured
products with predetermined materials,
direct labor, and manufacturing overhead
costs. This is done to value the
manufacturer's cost of goods sold and
inventory.
Normal Cost-Values manufactured
products with the actual materials and
direct costs, and manufacturing overhead
based on a predetermined manufacturing
overhead rate. These are used for the
cost of goods sold and for inventory
valuation.
(Retrieved on 9/10/11 from
http://blog.accountingcoach.com/normalcosting-standard-costing/)
RE:
Static
Ellen LaChance
9/10/2011
7:03:12 AM
vs
flexible
budget
Actual costing
is a system
that applies, or
traces, direct
costs to a cost
object. It uses
the direct-cost
rates
multiplied by
the actual
quantities
used. Indirect
costs are also
applied the
same way actual indirectcost rates
multiplied by
the actual
quantities
used.
Standard
costing is a
system that
traces direct
costs to the
output
produced.
This system
uses standard
price rates and
multiplies it
by the
standard
quantity of
inputs allowed
for the actual
outputs
produced and
assigns the
overhead costs
the same way
by multiplying
the standard
overhead-cost
rates by the
standard
quantities of
the allocation
bases allowed
for the actual
outputs
produced.
The standard
costing system
is known to
simplify the
record
keeping.
The difference
between actual
and standard
costing is
actual costing
uses actual
costs incurred
and standard
costing uses a
standard cost
that is
predetermined.
RE:
Static
vs
Daniel Arriagada
flexible
budget
9/7/2011 8:30:04
PM
An unfavorable variance is
the difference between a
budgeted expense (or
material, hours, labor, etc)
and the actual expense, being
the actual expense more than
the budgeted. When there is
a favorable variance, the
budgeted material is more
than the actual material used.
RE:
Static
vs
Tyrone Labad
flexible
budget
9/7/2011 9:18:10
PM
A favorable variance exists when
the actual price or actual quantity is
lower than the budgeted price or
budgeted quantity. The budgeted
price may have been set too high,
the actual price paid was lower
than the budget price resulting in a
favorable variance. A unfavorable
variance is just the opposite. If the
budgeted quantity or budgeted
price is lesser than the actual price
or actual quantity then it leads to an
unfavorable. These changes occur
due to several reasons, or changes
in the market.
RE:
Static
vs
Daniel Arriagada
flexible
budget
9/8/2011 9:51:52
PM
Well stated Tyrone.
Easy to understand
RE:
Static
vs
Instructor Louviere
flexible
budget
9/11/2011
1:57:12 PM
Class:
Does anyone
have
any experiences
with
budgeting and
variance
analysis? If
not, can
you speculate
whether the
budgeting
process at your
place of work is
sound or if it
could use
improvement.
RE:
Static
vs
Lisa Marie Johnson
flexible
budget
9/11/2011
10:59:10 PM
Although I
have little to
no
experience
with
budgeting
and
variance
analysis, I
can
honestly say
that
budgeting at
my place of
employment
leaves much
to be
desired. It
would
appear that
the
appropriate
operating
expenses
and goals
are not
clearly
taking into
account
when create
the
operations
budget
because we
always
seems to
exceed our
anticipated
goals and
can turn
little of no
profit on a
monthly,
quarterly
basis.
RE:
Static
vs
Deborah Kieffer
flexible
budget
9/11/2011
9:13:59 PM
When I worked at
the Aerospace
Maintenance and
Regeneration
Center - AMARC
(also known in the
Air Force as The
Boneyard) it seems
that's all the
financial analysts
did was report
our variances
between what we
had budgeted and
built our overhead
cost allocation
pools on and what
was reported as
actuals. It seems
we were constantly
adjusting for
swings from one
year to the next of
underestimating to
overestimating -- it
seems we could
never get our
budgeted and
actual costs to
even out. It was
very frustrating
and very much a
mystery -- we
were pretty much
left in the dark
when it came to
participating in the
budget builds so
we
never understood
some of the
reasons behind the
variances.
RE:
Static
vs
Elena Brechler
flexible
budget
9/11/2011
3:08:39 PM
I do not
have any
experience
with
budgeting
and
variance
analysis at
all. The
budgeting
process at
my
workplace
is sound
but it does
not mean
that we do
not go
overbudget
sometimes.
There are
always
unforseen
things such
as a new
client
coming on
board that
may
require IT
work to
implement
the change
and bring
them on
board.
That may
require new
software
and
additional
labor to be
put in place
in order to
keep up.
Flexible
Budget
Deyanira Barbosa
9/5/2011 12:09:08 PM
Managers find a flexible budget to be more superior than a static budget for the simple
reason that its flexible. This means that it can be adjusted for any level of production or
sales. It also allows managers to compute favorable and unfavorable variances, which lets
them calculate the operating income.
Flexible
vs. Static
Budgets
Janet Knowlden
9/5/2011 4:47:25 PM
A static or master budget developed around a single or static planned output level
whereas the flexible calculated budgeted revenues and budgeted costs based on the actual
output in the budget period. The static budget is flexed or adjusted for the period.
Flexible
versus
Static
Budgets
Michael Coleman
9/5/2011 9:34:35 PM
A flexible budget is a budget that adjusts or flexes for changes in the volume of activity.
The flexible budget is more sophisticated and useful than a static budget, which remains
at one amount regardless of the volume of activity.
RE:
Flexible
versus
Static
Budgets
Dominique Fryer
9/11/2011 8:20:43 PM
When you look at the two definitions it makes you think of why any company
would ever want to use a static budget over a flexible one. You never know why
your actual productivity is going to be so you do not want to be under budgeted.
A flexible budget helps to prevent that. The only way that the static budget
would be good is if the company only wants to produce a set amount of products.
That would limit them from making anymore products.
Flexible
vs. Static
Brandi Williams
9/6/2011 8:39:04 AM
It's been stated before, but I'll say it again, the static budget is based on the level of output
planned at the start of the budget period. (Horngren, Datar, Foster, Rajan, Ittner 2008,
p.226)
Flexible budget calculates budget revenues and budgeted costs based on the actual output
of the budget period. (Horngren, Datar, Foster, Rajan, Ittner 2008, p.228)
For managers it is better to evaluate the information from the flexible budget because it
shows "actual", rather than what was planned. Just because a certain budget was planned
does not mean the plans work out the way they were intended. The flexible budget shows
"actual numbers" (variable and fixed). There is no guess work with a flexible budget.
Flexible
budgets v.
David Bair
static
budgets
9/6/2011 2:54:48 PM
Let's begin by defining a flexible budget and a static budget and describing their uses. What is a static
budget and how does a flexible budget differ from a static budget? When would each of them be useful.
What types of decisions do they support?
As defined in our text, a flexible budget is: A budget developed using budgeted revenues and budgeted
costs based on the actual output in the budget period.
As defined in our text, a static budget is: A budget based on the level of output planned at the start of a
budget period. A static budget is also referred to as a "Master Budget".
A static budget is planned for a single level of output, such as manufacturing. Example, Lets say that XYZ
Company can manufacture widgets for a cost of $10 each. They budget $100,000 for manufactureing
10,000 pieces. This budget is static, meaning does not change, for the duration of that production run of
10,000 units or pieces.
A flexible budget give you the ability to change the amount ordered, for example, if the company only
ordered 9000 widgets or 11,000 widgets, the price would be the same, that's an example of a flexible
budget, You can vary the amount ordered to demand and still be within an alloted price point.
Flexible budgets are ideal for products that have a spike in season, such as lawn fertilizer, most people
apply it in the spring and summer so demand goes up, a flexible budget allows for quantity adjustments
while maintaining a specific price point.
Flexible
Michael Coleman
9/6/2011 8:03:02 PM
Flexable Budgets are the best and are what all companies should use in today's business
world. when a company has multiple items it will be more feesable to use a flexable
budget. This is to document all the differances in the product lines and being flexable can
maintain an accurate list if each product. this is what makes it better then the standard or
static budget.
Static budgets are used for services because they are more ridged. A ridged budget is not
versitle and it is not as manipulatable a s a flexable budget.
RE:
Flexible
Deyanira Barbosa
9/7/2011 12:39:32 PM
I agree with Michael, I’d also like to point out that businesses use budgets to evaluate
a manager’s performance pertaining to the department their in charge of. Production
levels are particularly important in this area because this determines the expenses
related to those departments. In a flexible budget numbers are adjusted accordingly.
RE:
Flexible Instructor Louviere
9/10/2011 5:29:05 AM
Next question:
Discuss how the analysis of fixed manufacturing overhead costs differs for a) planning
and control on the one hand and b) inventory costing for financial reporting on the
other hand.
Flexible
vs Static
Michael Hayward
9/7/2011 9:22:31 AM
Managers would feel that flexible budget is superior to static budget because with
flexible budgets you see what the actual amount and variances amount of the budget.
This gives the manager the actual output in the budget and not what was plan. As for a
manager, you like to know how you performing and what areas are doing what.
Static
Budgets
Michael Coleman
9/7/2011 5:04:50 PM
The US Military uses a static budget system because cost are supposed to be steady and
not flexable. This is the primary reason why the military needs to stay at a constant level
of troops. The branches of our armed forces need to stay around 330,000 so that the
budget stays the same. In a future of rising costs and constent spending the military will
have to shed troops and that will (according to Democrates the military needs to lower
the troop amounts to 100,000) put this country in danger. But it will also force the budget
to change to a Flexibal one because of all the constant changes. The budgets need to be
flexable it allows us to be flexable and roll with the changes that we deal with everyday.
We people in our personnal lives need to have a flexabile budget, but in some cases we
need to have a static budget when we are in a recession because we have limited funds at
that point and we need to stick to the stricktest budget possible.
RE:
Static
Budgets
David Bair
9/8/2011 3:51:28 PM
Letsw take a look at out flexible budget. I have a strict budget. 40% to taxes;
30% into savings 25% towards bills and 5% is play money. I can choose to
spend the play money or save it. Since I'm paid on comissions, my paycheck
changes. When that happens, anything over 5,000/month gross income, goes
directly into savings. They only flexibility I have is with my 5% of play
money...
Flexible
budget
superior to Brandon Green
a static
budget
9/7/2011 10:33:22 PM
I think managers would find flexible budgets superior to static budgets mainly because a
flexible budget resembles real-time data which can be analyzed for recognizable trends
and so on from things that have already occurred and make projections about how things
may continue in the future in addition to making decisions on things that need to be done,
watched, etc.
RE:
Flexible
budget
superior Jason Hall
to a static
budget
9/11/2011 1:31:30 PM
A flexible budget may sound better for managers but as an investor I would want a static budget.
I would want to know how a company plans to spend resources and then see if they are able to
end up with what they had planned. I would not want an open budget where a company can state
they have made their budget simply because the budget was not set in stone.
RE:
Flexible
budget
superior David Bair
to a
static
9/11/2011 3:16:07 PM
budget
Jason,
What about setting up a budget that has some flexibility; but with a cap;
so "X" amount of dollars could be spent; but all of it certainly wouldn't
need to. Allocate the funds to a certian point. I don't know how to
explain this; We can allocate funds say $1000 for office supplies, which
gives the flexibility of being able to use those funds if needed but
certainly doesn't mean that they have to be spent. In many situations
today, companies want to spend the entire budget in order to recieve the
same amount of funds next year. I guess what i'm saying is, there
should be a way to set up a static budget while giving it some flexibility
at the same time to meet the needs of both management and investors.
RE:
Flexible
budget
superior Brandon Green
to a
static
budget
9/11/2011 11:12:27 PM
I think what your saying here sounds similar to "padding" the
budget to give yourself a little wriggle room. That's about all it
would amount to I think. You think you need a little more for
this that or the other add it in there. of course you don't want to
go hog wild, but at least you'd have a little extra and coming in
under budget in the event you didn't use the extra you added in
there looks good at least number wise. It may also indicate poor
planning if the numbers are too far off, but maybe a better
alternative than coming in over budget especially if it's a lot
over budget. So, you make your static budget, pad it a little if
you think you need to for flexibility, and then present the whole
thing as the initial estimates to both investors and management.
Once things get rolling management can choose to use flexible
budgets instead and compare them to the static budget.
RE:
Flexible
budget Brandon Green
superior
9/11/2011 11:03:31 PM
to a
static
budget
Static budgets are not set in stone either being that one can easily go
over or under. It's just your best guess is what it comes down to and
rather you use known "standards" to estimate a static budget. Flexible
budgets aren't really any different except that it takes a period of time to
determine your "static budget" from your flexible-budget estimates. The
only real difference is using actual results vs. known "standards." As far
as investing goes at some point there would be a static budget present.
So, you might not want to invest in a brand spanking new company
using a flexible budget because they wouldn't be able to provide you
with one as flexible budgets require actual results or things that have
already happened to produce a set of numbers. However, a company
who's already been at it a while, rather they use flexible budgets or not,
is going to have a track record and some numbers an investor can make
a decision on. I say fit the budget to the application. I can certainly think
of instances where a static budget would be impractical and the same
goes for flexible budgets. Somehow I imagine investors figure it out and
decided yay or nay regardless of the budget type they use.
Summary
Instructor Louviere
9/11/2011 2:01:13 PM
This discussion has hinted at how decision-making can be impacted by the style of
budgeting used by an organization (which one could infer from reading this chapter in the
text)).
An important corollary to this is the idea of responsibility accounting. Common sense
would dictate that this already occurs, but as many of you noted, it is not necessarily
always a black and white issue.
In my experience, I have been around many such situations, but one really stands out.
My company had a three-month rebuild budgeted for a large condo project in Florida
(something we had done before). The actual time used by the project manager to
complete the project was 23 months. The upshot was additional costs that made the
finished project a money loser (we could not sell the condos for enough to cover the
costs). Simply put, the PM in this case did not follow budget, company protocol, did not
follow up on contractors and was more interested in eating fish sandwiches than doing
their job. As you might imagine, our budget was a shambles. While the PM was a big part
of the problem, the other was the breakdown in following the budgeted plan and failing to
put more resources into the project when they would have made a difference in the
outcome. Due to this, my company immediately instituted a modified master budgeting
technique that separately identified the construction budgets for all our construction
projects. Please note, I had proposed such a system three years earlier but was told it was
unnecessary, as the PM knew what they were doing.
Looking back to TCO 2 and this case, we can see the importance of using effective tools
for decision-making. A master budget is one of those tools. It is a bit more work, but is
generally a big improvement over a simple budget.
Flexible
Budget
Dominique Fryer
9/11/2011 8:11:13 PM
A flexible budget is nice because if the cost something rises or more materials are
needed, they can just be purchased and explained. If the budget is not flexible they will
have to cut costs somewhere else or simply not get the material. This could slow the
production for that section of the company. The problem with a flexible budget is that it
can be abused. It could start as one thing, then another, then another and so on. If this
becomes a problem then they will most likely lose the privilege of the flexible budget.