- A Individual Managers Are Held Responsible For Investigating Differences Between Budgeted And Actual Results And Are T 1 (106.19 KiB) Viewed 37 times
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a) Individual managers are held responsible for investigating differences between budgeted and actual results, and are then expected to take corrective action or amend the plan in the light of actual events. The wrong approach to budgetary control is to compare actual results against a fixed budget. Consider the following example. Tree manufactures a single product, the bough. Budgeted results and actual results for June for the bough are shown below. Production and sales (Units) Budget 1000 (RM) 37000 5000 for Actual results units for 2000 units Variance (RM) (RM) 80000 43000 Sales revenue 6500 -1500 3000 4500 -1500 3600 -400 Direct materials Direct labor Maintenance Depreciation Rent and rates Other costs Total costs 4000 1000 4000 3000 -100 1500 1600 3600 5000 -1400 20700 22600 -1900 Profit 16300 57400 -41100 In this example, the variances are meaningless for purposes of control. Costs were higher than budget because the volume of output was also higher (budgeted unit is 2000 units whereas actual is 3000 units); variable costs would be expected to increase above the budgeted costs. There is no information to show whether control action is needed for any aspect of costs or revenue. You are required to produce a flexible budget using marginal costing techniques based on the following information regarding cost behavior: i. ii. Direct materials and maintenance costs are variable. Although basic wages are a fixed cost, direct labor is regarded as variable in order to measure efficiency/productivity. Rent and rates and depreciation are fixed costs. (Other costs consist of fixed costs of $1,600 plus a variable cost of $1 per unit made and sold iii. iv. m b) At the most minimal level, a budget contains an estimated income statement for future periods. A more complex budget contains a sales forecast, the cost of goods sold and expenditures needed to support the projected sales, estimates of working capital requirements, fixed asset purchases, a cash flow forecast, and an estimate of financing needs. This should be constructed in a top-down format, so a master budget contains a summary of the entire budget document, while separate documents containing supporting budgets roll up into the master budget and provide additional detail to users. Required: Discuss the budget preparation process in an organization.