tools-for-enterprise-performance-evaluation

It is driven by the expected cost behavior fixed

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Unformatted text preview: It is driven by the expected cost behavior. Fixed factory overhead is the same no matter the activity level, and variable costs are a direct function of observed activity. When performance evaluation is based on a static budget, there is little incentive to drive sales and production above anticipated levels because increases in volume tend to produce more costs and unfavorable variances. The flexible budget-based performance evaluation provides a remedy for this phenomenon. 2.2 Flexible Budgets for Planning The flexible budget illustration for Mooster’s Dairy was prepared after actual production was known. While this tool is useful for performance evaluation, it does little to aid advance planning. But, flexible budgets can also be useful planning tools if prepared in advance. For instance, Mooster’s Dairy might anticipate alternative volumes based on temperature-related fluctuations in customer demand for ice cream. These fluctuations will be very important to production management as they plan daily staffing and purchases of milk and cream that will be needed to support the manufacturing operation. As a result, Mooster’s Dairy might prepare an advance flexible budget based on many different scenarios: Download free ebooks at bookboon.com 17 Flexible Budgets Tools for Enterprise Performance Evaluation MOOSTER’S DAIRY - Static Budget/Expense Analysis For the Month Ending July 31, 20X9 Budget (80,000 units) Budget (90,000 units) Budget (100,000 units) Budget (110,000 units) Budget (120,000 units) Notes $ 8 0,000 40,000 120,000 $ 9 0,000 45,000 135,000 $ 1 00,000 50,000 150,000 $ 110,000 55,000 165,000 $ 1 20,000 60,000 180,000 $1.00 per unit $0.50 per unit $1.50 per unit Total Variable Expenses $ 240,000 $ 270,000 $ 300,000 $ 330,000 $ 360,000 Fixed Factory Overhead $ 205,000 $ 205,000 $ 205,000 $ 205,000 $ 205,000 Total Manufacturing Costs $ 445,000 $ 475,000 $ 505,000 $ 535,000 $ 565,000 Variable Expenses Direct materials Direct labor Variable factory overhead * Please click the advert The above flexible budget reveals only the aggregate expense levels expected to be generated. In reality, supporting flexible budget documents would resemble the comprehensive budget documents portrayed in the prior chapter. Such comprehensive documents would provide the information necessary to manage the smallest of operating details that must be adjusted as production volumes fluctuate. Download free ebooks at bookboon.com 18 Flexible Budgets Tools for Enterprise Performance Evaluation 2.3 Flexible Budgets and Efficiency of Operation It perhaps goes without saying that computers are most helpful in preparing budget information that is easily flexed for changes in volume. Indeed, even the preparation of the very simple illustrative information for Mooster’s Dairy was aided by an electronic spreadsheet. Businesses save millions upon millions of dollars in accounting time by relying on computers to aid budget preparation. But, this savings is inconsequential when compared to the real savings that results from using computerized flexible budgeting tools. As production volumes ramp...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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