Need a discussion and 3 responses for students discussions

Cost Variance and Flexible Budget Analysis

    In the corporate world, accounting plays an important role in overseeing economic events like material purchases, sales, etc. It also helps business managers and supervisors in processing important data that are helpful in business development. Processing any business transaction involves collecting the data, categorizing it into appropriate categories, which is followed by summarizing and analyzing. Evaluating these costs help the production managers to determine the total cost, revenue and thereby profit (Horngren, 2009 ). This paper sheds some light on the accounting systems like standard costing, variance analysis and flexible budget and investigates how they may assist business managers in the day to day activities of their organization. As per the assignment, this paper also explores my present workplace and investigates how these ideas are applicable in my workplace.

Background

Presently, I am a production manager in an electronics manufacturing company. Being a production supervisor, I need to wear multiple hats. I am responsible for planning and organizing the production schedules. I cooperate with other managers to formulate the production objectives and understand the requirements. Ensuring the health and safety regulations, quality control, liaising with other buyers and sales representatives are also part of my job profile. I also organize a relevant training session for the new recruits.

Objective

The objectives of this paper are to –

·         Explore the various accounting systems

·         Determine how these accounting systems are used in my current workplace

·         Determine the advantages of flexible budget analysis over static budget analysis

·         Explore how can managers be aware of the causes of the flexible budget variances

A Brief Overview of the Accounting Systems

According to Drury (2009), the estimates of costs and products are predetermined and established. It is then compared with the actual costs incurred during the entire operation. Here, the predetermined costs are taken as standards that are incurred under efficient conditions. Variance can be computed by subtracting standard costs from actual costs. In other words, the standard cost is not as same as the budgeted costs (Berger, 2011 ). The standard direct materials cost is computed by multiplying the standard price and the standard quality for the direct materials. Both these standards are estimates of price and quantity (Belverd E. Needles, 2010 ). Material quantity variance is the variance between the number of materials used in actual production versus the quantity theta should have been used according to standard estimates. While material price variance is the difference between the amount that is paid for a given quantity of materials versus the amount that should have been paid according to estimates (Garrison, Noreen, & Brewer, 2009). Labor variance is concerned with labor cost, rate and efficiency (Lucey & Lucey, 2003). A flexible budget is an important accounting tool. It shows the variation of volume levels (Smith, 2002 ). Revenue variance is calculated by deducting the standard sales value from the actual sales value (Jain, 2000 ).

Uses of Accounting Systems

All the above-mentioned accounting tools are used in my organization. These tools help the business to keep track of the expenses, sales, liabilities etc. through a comprehensive statistical report that provides the managers with clear information which helps in decision making. Following are some of the complex calculations and balancing where the accounting tools are sued –

·         Expenses – Tracking the the outflow of cash from the organization.

·         Invoices: Invoices are payment request generated by the seller/manufactures listing the cost of the sold goods and services.

·         Investment – In my the organization the accounting tools are used to keep track of the investments and funding.

Advantages of the flexible budget over Static Budget

According to Charles T. Horngren, flexible budget estimates the budgeted revenues and costs on the basis of actual output. It is prepared at the end of the fiscal, after realizing the actual output (Horngren, 2009 ). On the contrary, the static budget is calculated at the beginning of the fiscal. As a result, a static budget is ineffective in controlling operations. Flexible budge provides business managers and entrepreneurs with important information they are helpful in identifying the problem areas (Albrecht, Stice, Stice, & Swain, 2007 ). Following are some other factors on why managers find the flexible budget more informative-

·         Using a flexible budget, managers can react to opportunities

·         Ability to adjust costs and margins

·         Relies on current data

Gaining insight into the causes of flexible-budget variances

In order to gain insight into the causes of variance inflexible budge, managers can subdivide the budgeted variance into direct material variance, efficiency variance and investigate them accordingly. In the last fiscal year, my company sold 10,000 units of copier machines. The following numerical can help in throwing some more light in the static-flexible budget variance analysis.

1.      Static Budget analysis

	Actual	Static-Budget Variances	Static Budget
Units sold Revenue	10,000 $250,000	2,000 $ 50,000	12,000 $300,000
Variable costs	80,000	40,000	120,000
Contribution margin Fixed costs Operating income	170,000   155,000 $15,000	10,000     10,000 $ 20,000	180,000   145,000 $35,000

Static budget variance = $20,000

                                                               2. Flexible budget Analysis

	Actual Results	Flexible- Budget Variances	Flexible Budget	Sales Volume Variances	Static Budget
Units sold	10,000	0	10,000	2,000	12,000
Revenue	$250,000	$10,000	$240,000	$50,000	$300,000
Variable costs	80,000	12,000	96,000	24,000	120,000
Contribution margin	168,000	24,000	144,000	36,000	180,000
Fixed costs	150,000	5,000	145,000	0	145,000
Operating income	$18,000	$19,000	$1,000	$36,000	$ 35,000

 

 

References

Albrecht, W., Stice, J., Stice, E., & Swain, M. (2007 ). Accounting: Concepts and Applications. Cengage Learning.

Belverd E. Needles, M. P. (2010 ). Principles of Accounting. Cengage Learning.

Berger, A. (2011 ). Standard Costing, Variance Analysis and Decision-Making. GRIN Verlag.

Garrison, R. H., Noreen, E., & Brewer, P. (2009). Managerial Accounting (11 ed.). Tata McGraw-Hill Education.

Horngren, C. T. (2009 ). Cost Accounting: A Managerial Emphasis, 13/e. Pearson Education India.

Jain, P. K. (2000 ). Cost Accounting. Tata McGraw-Hill Education.

Lucey, T., & Lucey, T. (2003). Management Accounting. Cengage Learning EMEA.

Smith, G. S. (2002 ). Managerial Accounting for Libraries & Other Not-for-profit Organizations.