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| Corporate practice bd |
01.What is flexible budget?
A
flexible budget is a budget that obviously adjusted with
the changes in volume or activity level . The flexible budget is
allowing the users what’s changes the activity level result create
the changes revenues .Under this
analysis a managers perform their activity efficiently also increase corporate
effectively.
02.What is the difference between a static budget and a flexible budget? (CMA-May -2022)
Ans:
Static budget:
A static budget is based on a single expected
activity level.
Flexible budget:
In contrast, a flexible budget reflects data for several activity levels.
03.Which of the two budgets would be more useful when planning the company’s cash
needs over a range of activity (CMA-May -2022)
Ans:
Given the focus on a range of activity, a flexible budget would be more useful because it incorporates several different activity levels.
04.Advantages
of Flexible Budgeting:
Since the flexible budget restructures itself supported activity levels, it's a decent tool for evaluating the performance of managers - the budget should closely align to expectations at any number of activity levels. it's also a useful planning tool for managers, who can use it to model the likely financial results at a spread of various activity levels.
Let,s start with some necessary formula for flexible budget
01.Activity variance = (Flexible budget -planning budget) where, Flexible budget is base for performance report.
02. Flexible budget Variance /Revenue & spending Variance = (Actual budget -flexible budget)
03.Flexible budget :
Revenue (A) (units sales@ ***) *****
Deduct :variable cost:
Direct material ****
Direct labor ****
Variable manufacturing overhead ****
Variable Selling Overhead *****
Total variable cost (B) *****
Contribution Margin C= (A-B) ****
Deduct :Fixed cost:
Fixed manufacturing overhead ****
Fixed general & administrative overhead ****
Total Fixed cost ( D ) *****
Net operating Income (C-D) ****
04.When given your question Planning budget,Actual budget,& flexible budget and asked there calculating flexible performance budget report. Then you must calculate-
a. Activity variance= (Flexible budget -planning budget)
b.( Revenue & spending variance ) for better flexible performance budget report.
05.Sales volume variance = (Flexible budget ) - (static budget/muster budget)
06.Flexible budget = (Actual budget -flexible budget)
07. Static budget / muster budget Variance :
The Static budget Variance is the difference between in the actual result and the corresponding budgeted Amount in the static budget.
08. A static budget or muster budget are same thing.
09. Performance report compare with Budgeted & Actual cost
=Actual units/ hours =will be budgeted units/ hours,when (flexible budget for performance report)
(Actual hours/Units 20,000) ={ (Budgeted Hours/Units may be 24,000 units(if any)}
***I mean Budget units or Hours Must be different from actual when asking in the question Performance report compare with Budgeted & Actual cost variance. ***
10.In a flexible budget for performance report =Actual units/ hours =budgeted units/ hours -like,
if (Actual hours-18,000) =will be (Budgeted Hours-18,000 )
11. In a flexible budget for performance report must all cost separated into
a.Variable and
b.Fixed cost
Let,s start with Practical Example
Practical Example. (01) (CMA-May-2023)
XYZ company Ltd uses a comprehensive budgeting process & compare actual results to budgeted amounts monthly basis. Operating result for the month of September appear below-
XYZ Company Ltd
Operating results
For the month of September
Particulars Muster budget Actual Variance
Units sold 5,000 4,800 200 (UF)
TK. TK. TK.
Revenue 12,00,000 11,52,000 48,000(UF)
Variable cost 7,60,000 7,80,000 20,000 (UF)
Contribution margin 4,40,000 3,72,0000 68,000 (UF)
Fixed overhead 1,80,000 1,80,000 -
Fixed general and administrative cost 1,20,000 1,15,000 5000(F)
Operating income 1,40,000 7,7000 63,000(UF)
Others cost data(budgeted)
Material cost per unit Tk.60.000
Direct labor cost per Tk.44.000
Variable overhead Tk.36.000
Variable selling Tk.12.000
Total variable cost Tk.780000 for September include Tk.320000 for material Tk.192000,direct labor TK.176000 for variable over head,& TK.92000 for variable selling expense
Requirement
1.Prepare flexible budget for XYZ company ltd for the month of September that included separate variable cost budget for for each type of cost
2.Determine the variance between the flexible budget & actual cost for each cost items
3.Discuss how the revised budget & variance data are likely to impact the behavior of MR X production manager.
Answer (Req-01):
XYZ Company Ltd
Flexible budget
For the month of September
Revenue (A) (4800 units@ 240) 11,52,000
Deduct :variable cost:
Direct material (4800*60) 2,88,000
Direct labor (4800*44) 2,11,200
Variable manufacturing overhead (4800*36) 1,72,800
Variable Selling Overhead (4800*12) 57,600
Total variable cost (B)
7,29,600
Contribution Margin C= (A-B) 4,22,400
Deduct :Fixed cost:
Fixed manufacturing overhead 1800000
Fixed general & administrative overhead 120000
Total Fixed cost ( D ) 3,00,000
Answer (Req-02):
XYZ Company Ltd
Flexible budget(Variance)
For the month of september
Particulars Actual Flexible(budget) Variance
Units 4800 4800 0
Revenue (A) 11,52,000 11,52,000 0
Variable cost:
Direct material 3,20,000 2,88,000 32,000(UF)
Direct labor 1,92,000 2,11,200 1,92,00(F)
Variable overhead 1,76,000 1,72,800 32,00(UF)
Variable selling overhead 92,000 57,600 34,400(UF)
Total variable cost(B) 7,80,000 7,29,600 50,400(UF)
Contribution margin C=(A-B) 3,72,000 42,2400 50,400
Fixed cost:
Fixed factory overhead 1,80,000 1,80,000 0
Fixed general & admin overhead 1,15,000 1,20,000 5,000(F)
Answer (Req-03):
The revised budget and variance data are likely to have the following impact on MA Latif behavior-
Latif is likely to be encourage by the revised data. since the major portion of the variable cost variance is the responsibility of others.
The details report of variable cost shows that the direct labor variance is favorable.latif should be motivated by this report because it indicates that the cost-cutting measures that the implement in the manufacturing area have been effective.
The report shows unfavorable variance for direct material and variable selling expense .Production manager latif may be encourage to work with those responsible for these areas to control cost.
Practical Example. (02) (CMA-May-2022)
The ABC company Produce & sales Industrial Ventilation fans. The company plans to produce 72000 fans over the next quarter at the following cost-
Variable : & Fixed cost
Direct
material 14,40,000
Direct
labor 3,60,000
Variable manufacturing overhead 4,50,000
Fixed manufacturing overhead 9,00,000
The last amount include 72,000 of straight line depreciation and TK.1,08,000 of supervisory salaries .after first quarter end The ABC company reported the following cost
Direct
material
4,32,000
Direct
labor 1,10,600
Variable manufacturing overhead 1,52,000
Depreciation 24,000
supervisory salary 37,800
Fixed manufacturing overhead 2,39,000
Total cost 9,95,900
Habibur rahman & his crews runs the production was 20000 fans
Requrement:
1.Prepare a performance report that compare budgeted & actual costs for the period just ended.
2.Prepare a performance report that compare flexible budgeted& Actual costs for the period just ended.
3.Which of the two reports is prepared? should Rahman be Praises for outstanding performance or is the general managers warning appropriate? Explain .
Answer (Req-01):
ABC Company Ltd
Static budget(performance )
For the month of September
Particulars static budget Actual Variance
Units 24,000 20,000 4000
Variable cost:
Direct
material @20 4,80,000 4,32,500 47,500(F)
Direct
labor @5 1,20,000 1,10,600 9,400 (F)
Variable( MOH )@6.25 1,50,000 1,52,000 2,000(UF)
Depreciation 24,000 24,000 -
Supervisory salary 36,000 37,800 1,800(UF)
Others fixed (FMO) 2,40,000 2,39,000 1,000(F)
Total cost(B) 10,50,0000 9,95,900 54,100(F)
Working note:
Material=Tk14,40,000/72000units=20.00per unit
Direct labor=3,60,000/72000 units=5.00 per unit
Variable manufacturing overhead =4,50,000/72000units=6.25 per unit
depreciation=72,000/03 month=24,000 per month
supervisory salary=1,08,000/03 month=36,000 per month
Other fixed manufacturing over head=(9,00,000-72,000-1,08,000)/3 month=2,40,000 per month
Answer (Req-02):
ABC Company Ltd
Flexible budget(performance )
For the month of September
Particulars Flexible budget Actual Variance
Units
20,000 20,000
-
Variable cost:
Direct
material @20 4,00,000 4,32,500 32,500(UF)
Direct
labor @5 1,00,000 1,10,600 10,600 (UF)
Variable(MOH )@6.25 1,25,000 1,52,000 27,000 (UF)
Depreciation 24,000 24,000 -
Supervisory salary 36,000 37,800 1,800(UF)
Others fixed (MOH) 2,40,000 2,39,000 1,000(F)
Total variable cost(B) 9,25,000 9,95,900 70,900(UF)
Answer (Req-03)
A performance report based on flexible budgeting is preferred.The report compares budgeted and actual performance at the same volume level,eliminating any variation in activity.In essence everything is place on a level playing field.
The general manager warning is appropriate because of the sizable variance that have arisen.
Practical Example. (03) (Try yourself) (garrison page-408)
The
wimax company LTD has a restaurant .Data concerning the restaurant monthly revenues and cost appear below. where ,Q = no of meals served.
Formula
Revenue = Tk.16.50q
Cost of ingredients = Tk.6.25q
Wages & salaries = Tk.10,400
Utilities = Tk.8,000+0.20q
Rent= Tk.2,200
Miscellaneous = Tk.600+0.80q
The actual result for the April appear below.
Formula
Revenue = Tk.27,920
Cost of ingredients = Tk.11,110
Wages & salaries = Tk.10,130
Utilities = Tk.1,080
Rent = Tk.2,200
Miscellaneous = Tk.2,240
Requirement:
01.Prepare the restaurant planning budget for April assuming that 1800 meals are served.
02. Assuming that 1700 meals ware actually served in April.prepare a flexible budget for this level of activity
01.Prepare a flexible budget performance report for the restaurant for April.
Answer (Req-01)
The planing budget for appril for april appears below
The wimax company LTD
Planning budget
For the month ended April,30
Budgeted Meals served(q) 1,800
Revenues ($16.50*1800) 297,00
Expense
Cost of ingredients (6.25q*1,800) 11,250
Wages & salaries 10,400
Utilities ($800+0.20q) 1,160
Rent 2,200
Miscellaneous(600+0.80q) 2,040
Total Expense 27,050
Net operating income 2650
Answer (Req-02)
The flexible budget for April appears below
The wimax company LTD
Flexible budget
For the Month ended April,30
Actual Meals served(q) 1700
Revenues ($16.50*1700) 28050
Expense
Cost of ingredients @6.25q 10625
Wages & salaries 10400
Utilities ($800+0.20q) 1140
Rent 2,200
Miscellaneous(600+0.80q) 1960
Total Expense 26325
Net operating income 1725
Answer (Req-03)
The flexible budget performance report for April appears below
The wimax company LTD
Flexible budget(performance report)
For the Month ended April,30
(01) Actual -Revenue & spending variance (1-2) Flexible budget(2) Activity variance (2-3) Planing budget(3)
Actual Meals served(q) 1700 1700 1800
Revenues ($16.50) 27920 ( 130 UF) 28050 1650 (UF) 29700
Expense
Cost of ingredients @6.25q 11110 485 (U) 10625 625F 1125
Wages & salaries 10130 270 (F) 10400 0 10400
Utilities ($800+0.20q) 1080
60 ( F ) 1140 20F 1160
Rent 2200 0 2200 0 2200
Miscellaneous(600+0.80q) 2240 280 ( U ) 1960 80(F) 2040
Total Expense 26760 435(UF) 26325 725(F) 27050