DR-6

Reply to Discussions

D1: Veena

Concepts discussed in chapters 9 and 10 from textbook are how to create operating budgets, importance of cost variance analysis. Authors of textbook have described about the different phases involved in the creation of operating budgets which includes planning phase and control phase. As per the authors there are different budgets involved in the operating budgets. Gaffney has explained the definition of operating budget as something which shows what is company’s revenue and what could be expenses that can incur in the future which usually would the upcoming year and this information is included in income statements. As per Gaffney assembling different budgets can be time consuming specifically for the large-scale companies. As per the authors from accounting verse blog, cost variance analysis can be used for the assessing the performance or evaluating the organization cost center which is a responsible for controlling the over costs involved in the different departments of the company like production department, finance department.

 

As a manager I would learn and dive into the concepts and real time examples for operating budgets and would definitely try to create one for the company which will include different budget calculations like sales budget, master budget, production budget, budget required for purchasing the direct material required in the production, budget required for direct labor, budget that could be an overhead for manufacturing using a budgeting process and then create budgeted income statement which would be helpful to create different budget statements and then can be used in the creation of operating budgets.

 

Static budget analysis will have all the details of budget involved for upcoming or expected production whereas fixed budget is created at the end of budget period which includes the variations of static budget to the actual expense required for the production. For example if a company typically produces about 500 units of a product in the half yearly time span then this number can be used for the static budget calculation which can be varied in the actual scenario(Assad, n.d) while a manager can analyze about the each budget detail which was expected and what was the actual number for that particular item or expense from the fixed budget analysis which gives more practical example for them to take better decision.

 

For a manager it is essential to have a good knowledge on Flexible budget variance and this can be achieved by analyzing the flexible budget and static budget which gives the clear variance of the costs how they differ from static budget to flexible budget where static budget is created by the assumptions and predictions before the process started while flexible budget gives the information of the actual budget involved in the production process which is created at the end of the period. For example, the as per the static budget if the cost involved in the direct material is $10 per item but when it comes to flexible budget if it is about $18 then the variance in the budget reveals that there was an inappropriate estimation in the material budget calculation.

 

References:

Cost Variance Analysis - AccountingVerse. (n.d.). Accountingverse.Com. Retrieved July 5, 2020, from https://www.accountingverse.com/managerial-accounting/responsibility-accounting/cost-variance-analysis.html

‌

Why Would a Company Find a Flexible Budget Variance More Informative? (n.d.). Smallbusiness.Chron.Com. https://smallbusiness.chron.com/would-company-flexible-budget-variance-informative-34699.html

‌

What Is an Operating Budget? (n.d.). Small Business - Chron.Com. Retrieved July 5, 2020, from https://smallbusiness.chron.com/operating-budget-61475.html#:~:text=An%20operating%20budget%20starts%20with

Reply:

D2: Vyshnavi

I believe ethical thoughts plays major role in any decision-making scenarios where ethics are important and represent people perspective. So, in that regards, people and decision makers needs to seek some common set of goals.

Following are the few principles for ethical thoughts-

1.      Justice- This principle implies that the ethical theory must comply with the actions and must have a significant difference even on cases with inconsistent decisions.

2.      Respect for Autonomy- Every individual must have rights on their chosen lifestyle as they are the one who completely understand it. Hello Everyone,

Operating Budgets: Operating budgets includes all the revenues and expenses which are covered all over the time with the organization, institutions or companies which they plan for the operations to happen. Planning and controlling budgets are very important in this competitive world at least to survive and stand on the position in the market. Budgets are established in advance to help organizations communicate their plans to employees and to help employees coordinate activities across the entire organization.

1)      As a manager, I would definitely see the planning phase and control phase that are presented in the chapter9 and which helps to make decisions that reflects the organization phases. As mentioned, for example, Jerry’s Ice cream operating with no budget how would things would be gone and income would fall for the organization to have the production to plan and increase the production. Controlling phase is always important in every organization whether it can be financially or anything but limiting to what needed helps to avoid the unnecessary activities and the budgets on the organization (Woodruff, 2019).

2)      Flexible Budget analysis has much better operating procedure budget performance than the static budgeting since they can relate to the actual revenues to the budgeted revenues and the which helps the managers to find out the actual cost to the budgeted costs for the same level of the work.  They also seem to have more insight of the variances than the static budgets which mangers thin to have flexible budget analysis ore chosen (Woodruff, 2019).

3)      Flexible budgets are more important than the static budgets are, it has the good cost management and control over the analysis and systematic control for the flexible budgets. For example, every organization needs better profitability, should have the better evaluation when it comes to the flexible budget or anything but not just have the numbers which are random hen we take more significant cases in the market. So and so company has the budget or $100 million in revenue and $$0millions cost of the goods that are sold. Different organization has the different aspect of the flexible budgets on how they do it (Reed, 2019).

Reference

Woodruff, J. (2019). The Advantages of a Flexible Budget.

https://smallbusiness.chron.com/advantages-flexible-budget-57105.html

Reed, E. (2019). What Is a Flexible Budget? Definition and Example.

https://www.thestreet.com/personal-finance/savings/what-is-a-flexible-budget-15020324

 

Reply:

D3 : Capital Budgeting:

            The process of identifying which proposed fixed asset purchases a business should accept and which should be declined. Capital Budgeting is used as a quantitative view of each proposed fixed asset investment, which thereby gives a data based rational basis for deciding. There are number of methods used to evaluate fixed assets. The most used methods are Net present value analysis, Payback period, Constraint analysis, Avoidance analysis (Batra,& Verma, 2017).

Operating Budget:

            An Operating Budget includes all the revenues and expenses over a period (usually a year or a quarter) for which an organization, a government or a corporation uses to plan its operations for that given period. Operating Budget is prepared well ahead of a reporting period as a plan that helps the business is expected to accomplish. The key components of an Operating Budget are: Revenue, Variable Costs, Fixed Costs, Non-cash Expenses, Non-Operating Expenses and Capital Costs in an operating budget (Torabi, 2015).

1. As a manager, I would use Capital Budget and Operating Budgets to leverage their advantages. For one, Capital Budgeting gives a numerical and more rational basis for deciding at managerial level for deciding whether investing in long-term assets (which involves a lot of cash) is viable or not. This are all crucial decisions for a company as it can make it or break it. Investing in proper long-term assets with such huge amounts of cash can help a business to stand apart and gives a competitive edge over the others. But at the same time without heeding to the calculations from Capital Budgeting, it can lead to bankruptcy and as a manager I rely on this (Kengatharan, 2016).

2. Static budget is the budget that remains constant even if there are any significant changes from the strategic planning. Whereas, flexible budget allows to adjust and accommodate any changes that deviates from the assumptions made during financial and strategic planning earlier the year (Mihailă, Bădicu, & Jieri, 2019).

The flexible budget gives a greatest advantage over static budget because of its adaptability. The assumptions made by the business while preparing budget may be challenged in real world during the year. A flexible budget on the other hand can handle the changes because of this reality and put the business in a better position for all the challenges.

3. Flexible budget shows the altering levels of revenue and expense, mainly based on the amount of activity (sales/unexpected expenses) that occurs. Flexible budget variance is the difference between the results generated by the flexible budget model and actual results. For any of the actual revenues inserted into the flexible budget model, the variance will arise between the budgeted and actual expenses but not revenues (Eman, & Nassar, 2017).

Example: Consider a flexible budget model where the price per unit is set to $200. Last month, 1000 units are sold, and the actual price sold per unit is $ 110.   Hence flexible budget variance related to revenue of $10,000 (1000 units * $10). The model also contains an assumption of the cost of goods sold per unit will be $50. In the current month, the actual cost per unit turns out to be $55. Hence the unfavorable flexible budget variance related to the cost of goods sold $ 5000 (1000 units * 5 per unit). In total, by looking at the above example, there is a favorable variance of $5000.

References

Batra, R., & Verma, S. (2017). Capital budgeting practices in Indian companies. IIMB Management Review, 29(1), 29-44.

Eman, A. H., & Nassar, M. (2017). The Factors Affecting the Different Management Accounting Practices in Small and Medium Sized Enterprises in Jordan. International Journal of Academic Research in Business and Social Sciences, 7(12), 2222-6990.

Kengatharan, L. (2016). Capital budgeting theory and practice: a review and agenda for future research. Applied Economics and Finance, 3(2), 15-38.

Mihailă, S., Bădicu, G., & Jieri, N. (2019). Possibilities of Continuous Improvement of Budgets by the Kaizen Method in the Current Context. Eastern European Journal for Regional Studies (EEJRS), 6(2), 81-99.

Torabi, I. (2015). Implementation of Operational Budget According to Activity-Based Costing in Chahar Mahal Bakhtiari and Isfahan Provinces. International Journal of Accounting Research, 42(1838), 1-5.

Reply: