Disc 5

Week 5 Discussion Forum

Chapter 8:

https://saylordotorg.github.io/text_managerial-accounting/s12-how-is-capital-budgeting-used-.html

Chapter 9:

https://saylordotorg.github.io/text_managerial-accounting/s13-how-are-operating-budgets-crea.html

Chapter 10:

https://saylordotorg.github.io/text_managerial-accounting/s14-how-do-managers-evaluate-perfo.html

Variance Analysis

Write an analytical summary of your learning outcomes from chapters 9 and 10. In addition to your analytical summary, address the following:

1.     As a manager, discuss how you would use or have used the concepts presented in chapters 9 and 10.

2.     Why might managers find a flexible-budget analysis more informative than static-budget analysis?

3.     How might a manager gain insight into the causes of flexible-budget variances for direct materials, labor, and overhead? Provide at least one numerical example to support your thoughts.

Required:

1.     Post your original discussion no later than day Sunday. Read and respond to at least 3 of your classmates’ posts. See the class syllabus for posting requirements.

2.     Be sure to support your work with specific citations using APA format

3.     Read a selection of your colleagues' postings using one or more of the following ways:

·        Share an insight from having read your colleagues' postings, synthesizing the information to provide new perspectives.

·        Offer and support an alternative perspective using readings from the class materials or from your own research.

·        Validate an idea with your own experience and additional research.

·        Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings.

·        Expand on your colleagues' postings by providing additional insights or contrasting perspectives based on readings and evidence.

·        Return to this Discussion several times to read the responses to your initial posting. Note what you have learned and/or any insights you have gained as a result of the comments your colleagues made.

Reply to post 1:

Analytical Summary

a.       Capital Budgeting

Capital budgeting involves forecasting and planning for capital expenses, expenses that relate to long-term assets like land, machinery, or infrastructure. Items that fall under the scope of capital budgeting typically are expensive, have far reaching consequences and strategic in nature (Managerial Accounting, 2012). Capital budgeting is hence an important decision-making aspect for most companies as part of budgeting for an upcoming planning cycle.

b.      Operating Budgets

Budgeting at any established company comprises of departmental budgets, each department taking inputs from the preceding department in the order of sequence of planning and operations. For example, the production department takes inputs from sales departments to decide on the production budget, while the accounting team takes inputs from both sales and production teams to estimate SG&A budget. For an upcoming year, the operating budget mainly includes sales and production budgets, ending inventory budgets, SG&A budget, capital expenditure budget and cash budget. All of these budgets then contribute to calculating forecasted financial statements for the company, like income statement, and balance sheet.  

2.      Flexible Budget vs. Static Budget

Flexible and static budgets are two different ways to budget costs in companies. While static budgets are estimations of costs that a company would incur in the upcoming planning cycle (typically an year or quarter), flexible budgets relate to the actual costs incurred during that period (Assad, n.d.). In other words, flexible budgets are calculated after the period ends, based on the actual costs incurred. Flexible budgets can provide finance managers with more realistic picture of the company’s expenses, compared to static budgets. This is the reason many prefer to look at flexible budgets compared to static budgets. Although, in my opinion, both budgets are important for a company: while static budgets paint an estimated picture of future expenses and help companies plan; flexible budgets help identify gaps in static budgets, analyze unforeseen increases/savings in expenses and prepare future static budgets better!

3.      Flexible Budgeting Example

If I am a manager of a company producing toys, and I budget costs of $1.5 for material, $2 for labor and $1.25 for overhead, and my forecast for the upcoming quarter is that my company will sell 1,000 units. This becomes my static budget. Now let us say at the end of the quarter the accounting team has calculated that the company has actually spend $1.75 on material, $2.05 on labor and $1.5 for overhead, and the company has sold 1,100 units, this means that my static production budget for the quarter was ($1.5*1000 + $2*1000 + $1.25*1000) = $4,750. My flexible budget for production department would be ($1.75*1100 + $2.05*1100 + $1.55*1100) = $5,885. The budget variance for the quarter would be $5,885 - $4,750 = $1,135.

Reply to post 2:

The concepts in chapters 9 and 10 are highly applicable in a managerial position. As a manager, I acknowledge that my scope of work would also entail submitting organizational forecasts. I would be required to set the organization’s operational and financial objectives using budgets. Our readings on budgeting would help me to proactively control and align the performance of various organizational operations with the predetermined budgets. I would use budgeting to define the organization’s objectives in numerical terms, and thereafter establish a robust plan for organizational spending. Budgeting would serve as my guide for standardizing organizational processes. Additionally, as a manager, I would also use budgeting and the budgetary control process to formulate and evaluate organizational goals and policies, and to direct both revenue and capital resources profitably. 

I would use variance analysis to promptly uncover weaknesses, inefficiencies, deviations, or even risks in the organization's areas of operation and create means to overcome them to achieve the set organizational goals. With variance analysis, I would be able to measure and analyze the organization's already achieved results. This way, I would understand how actual performance fell short or exceeded the established standard performance. I would use variance analysis to determine the organizational policies and procedures that should be modified in order to improve performance. Flexible budget analysis is much better compared to static budget analysis because the former offers a better tool for performance evaluation (Narasimhan, 2017). When performance evaluation is based on static budget analysis, in the event that the actual performance varies from the anticipated level, the likelihood of variances rising is high, and these variances may be misleading. Since flexible budget analysis is driven by the expected cost behavior, it provides managers with a better tool for evaluating performance. Unlike static budget analysis, flexible analysis enables managers to make the necessary adjustments/corrective actions for changing operational costs and profit margins for the benefit of the organization. Therefore, flexible budget analysis offers better cost controls since it enables managers to react promptly to unanticipated adverse conditions.

Managers get to update their projections and cost controls with current information continually, and they can thus take advantage of unexpected opportunities using the flexible budget analysis (Horngren et al., 2015). To gain insight into flexible budget variances, a manager can insert actual revenues into a flexible budget model. This way, any variances between the budgeted and actual expenses would arise. Simply put, flexible budget variances are the differences between the actual results and the results generated by the flexible budget model. For example, if in a flexible budget, the actual costs of materials as presented in the flexible budget model is $76,000 and the flexible budget figures for materials are $80,000, the flexible budget variance for materials would be -$4,000, which is a favorable variance since the flexible budget numbers exceed the actual figures. If the actual figures for labor were $63,200, and the flexible budget figures for labor were $60,000, the variance would be $3,200, which is an unfavorable variance. If the actual overhead costs were $12,880 and the flexible budget figures captured for overheads were $12,000, the variance would be $880, which is an unfavorable variance.

Reply to Post 3:

The quick materials spending makes it straightforward for directors to know when and what number of unrefined materials should be mentioned. The equal applies to direct work required. The critical work and the foreseen work rate are set up to develop the quick work money related arrangement, while materials and work are gotten from a creation spending plan. Current information on fixed collecting costs is composed of variable amassing costs to learn the gathering overhead money related arrangement. The nuances gathered from the business spending plan is used to determine the arrangements and administrative monetary arrangement (Schmidgall, and Kim, 2018). At last, the arrangements, direct instruments, direct work, fixed collecting overhead monetary arrangement, similarly as arrangements and office spending plans are utilized in making an expert forma compensation clarification. 

Versatile spending makes it functional for a business to discover extra changes appeared differently in relation to static money related arrangement. Making a static budgetary arrangement is connected with the usage doubts and guesses on bargains, the market, fiscal conditions similarly as various parts that impact business before the investing energy outline starts; these speculations could be correct. The nuances from the versatile budgetary arrangement rely upon certifiable results, that makes it possible to make acclimation to the static spending plan for accuracy to make assessments on the results (Yahya-Zadeh, 2012). The business makes connections of the certifiable line-by-line costs and gains profit by versatile going through an arrangement with the desires made in the static money related arrangement. Difference data, for example, the complexities among envisioned and certified arrangements and envisioned and real working costs, encourages the business to improve the viability and point out hazardous regions. For instance, if a static spending plan has a material that costs $45 per piece, the versatile spending shows $65 per piece, the difference could reveal an issue with the material mentioning decision. 

Supervisors find adaptable spending fluctuation more enlightening when contrasted with static spending change on the grounds that an adaptable spending grants assessment of business execution in any event, during the time of static planning, and ordinarily shows business utilizing yield figures that ought to have been given by the static financial plan. An adaptable spending plan is viewed as more enlightening in light of the fact that it allows any business to see more number of factors when contrasted with a static financial plan. On one hand, a static spending plan incorporates suppositions just as forecasts identified with deals, financial conditions, the market, and a few different angles that sway any business preceding planning period, and these suspicions may frequently be incorrect(Lee, 2018). Then again, data from adaptable spending change depends on real results, in this manner allowing the business to make essential modifications in the static financial plan for expanded exactness for the examination of results. It at that point thinks about real expenses just as benefits from the adaptable spending plan with that of the past estimations that were made during a static financial plan. 

Knowledge into the reasons for adaptable spending differences for direct materials, work, and overhead 

A chief frequently gains understanding into the reasons for adaptable spending fluctuations for work, direct materials, and overhead. This specific spending plan uncovers dependent on genuine figures of yield from the static spending time frame. For example, static spending covers the creation of around 1000 units in the event that where creation made is 600 units; in any case, the adaptable spending will consider just 600 units. The knowledge into reasons for such spending fluctuations for factors like work, cost, and overhead is picked up as it clarifies the figures for every one of the details from a static financial plan. Such things regularly change with the nature of the business, ordinarily including overhead costs, for example, work cost, materials, and so forth.