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Unformatted text preview: Lecture 17: Budgetary Control
The lecture will enable you to: Explain budgetary control Identify the use of flexible budgeting in performance evaluation and control Prepare flexed budgets in line with changes in activity levels Use of standard costing in performance evaluation and control Calculate the individual variances to explain differences between actual and standard performance Explain the reasons for variances between actual and standard performance Learning activities Read Accounting for Management book chapter 9 Try questions 9.3 and 9.4 Spend 3 hours on Understand Management Accounting Budgeting 2 Practice variance analysis questions on Moodle Purposes of Budgets Planning Forecasts activity, volume, costs , cash, sales Targets Performance management How well have we achieved our plans? Do we need to make changes Calculations of variances Taking remedial action to stay on course Make revision of plans Control Tools for Budgetary Control Standard Costing Identifies the planned unit cost of each element of cost Standard is a unit Budget is a total The master budget is changed to reflect actual production activity Price variances Quantity variances Volume variances Calculate and explain variances Flexible Budgeting Variance analysis A system of costing that can be used in business environments where repetitive operations are carried out Standard costs are the budgeted costs of individual units of production Standard cost is compared to actual cost to calculate an overall variance Standard Cost A standard is a predetermined target Establishing the target Based on ideal conditions of operations Based on realistic conditions of operations Industrial engineering Example: Standard cost of material= 35 (SQ * SP) 7 kg of metal purchased @ 5 per kg Example: Sherborne Suggate
Standard cost card: Example: Sherborne Suggate
Budget for January 20X3: Example: Sherborne Suggate
Actual for January 20X3 The overall variance can be broken down in order to identify: The effects of variation in the volume (quantity) of resource inputs SQ-AQ Quantity variance The effects of variation in the price of the resource inputs SP-AP Price Variance It is important to compare like with like. The initial budget assumes sales of 1000 units. Fixed Budget Actually, 1100 units were sold. To make a valid comparison we must FLEX THE BUDGET For actual activity how much should costs and revenues have been? Budgetary control statements
Original budget (1000 units) Sales Costs Profit 150000 120000 30000 Flexed budget (1100 units) 165000 Actual results (1100 units) 159500 Variance (flexedactual) 5500A 2315A 7815A 125000 127315 40000 32185 Variance Analysis For each element of cost and revenue calculate: Price variance (SP-AP)AQ Differences due to price actual quantity purchased Differences due to efficiency, usage etc of resource Quantity variance (SQ-AQ)SP Adverse variance: where an expense item is greater than budgeted or where an income item is less than budgeted Favourable variance: where an expense item is less than budgeted or where an income item is more than budgeted The process of responsibility accounting ensures that problems are tracked to their source Responsibility must be correctly attributed or resentment and demotivation may result A key element of the overall variance is that more units were sold than originally budgeted. Sales profit volume variance is the difference between the original budget profit and the flexed budget profit: 40 000 - 30 000 = 10 000 Favourable Because more units sold than budgeted... more profit Although extra sales have been made, the selling price is lower than budgeted...Adverse price variance Direct materials price variance Actual quantity of materials used at actual price Actual quantity of materials used at standard price We compare: Direct materials quantity variance
We compare Actual quantity of materials used at standard price Standard quantity of materials used at standard price Direct labour rate variance
We compare: Actual hours of direct labour at actual wage rate Actual hours of direct labour at standard wage rate Direct labour efficiency variance
We compare: Actual hours of direct labour at standard wage rate Standard hours of direct labour at standard wage rate How efficient have workers been in terms of hours Sales volumes - may vary because of greater than expected success of an advertising campaign Materials quantities - may vary because of better or worse quality of material than expected; labour efficiency Material price: quality of purchases, inflation, supplier discounts Labour rates - may vary because of unexpected increase in rate arising from negotiations over wage levels Labour efficiency: use of different grade of worker; technology; learning; morale Poor standard setting and out of date standards Read: Pages 312-314 Management must decide the criteria to use in deciding which variances should be investigated: Investigation is costly What are the costs and benefits? How significant is the variance in percentage or monetary terms? Frequency of occurrence Both Adverse and Favourable variances must be analysed Assessment 3 performance Very good. Only 33 (9%) students did not get 40%. Please see me !! Attend feedback and exam preparation workshops this week. Final exam is not multiple choice. Workshop is for exam preparation ...
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This note was uploaded on 04/17/2008 for the course MN 1041 taught by Professor Agyemang during the Spring '08 term at Royal Holloway.
- Spring '08