Calculate the flexed budget and the key variances between budgeted and actual results.

Calculate the flexed budget and the key variances between budgeted and actual results.

The calculation of flexible budget as presented below follows this step:

1.      Identify cost and group them into budget model

2.      Determine changes in variable cost with subsequent changes in activity measures

3.      Create budget model

4.      Enter the exact activity measures into the model once an accounting period has been completed.

5.      Enter the produced flexible budget for the completed period and compare with actual expenses. (Adapted from: Acountingtools.com, n.d)

 

	Actual	Flexed budget	Variance	Favorable?
Units of Service	1,600	1,600	-	-
Sales Revenue	£124,400	£124,400	-	-
Labor hours	860	800	60	Yes
Labor cost	£20,210	£32,000	£11,790	No
Variable OH costs	£8,170	£8,000	£170	Yes
Fixed Cost	£68,000	£68,000	-	-
Total Cost	£96,380	£108,000	£11,620	No
Operating Profit	£28,020	£16,400	£11,620	No

 

 

 

 

Reconcile the original budget and present the relationship between the budgeted and the actual profit for the month November

The formula for reconciliation is: (budget +favorable variance) – (unfavorable variance)

 

	Original Budget	Actual
Units of Service	1,500	1,600
Sales Revenue	£120,000	£124,400
Labor hours	810	860
Labor cost	£3,210	£20,210
Variable OH costs	£7,670	£8,170
Fixed Cost	£68,000	£68,000
Total Cost	£78,880	£96,380
Operating Profit	£17,880	£28,020

 

The above calculation shows that there exists a negative relationship between the budgeted and actual profit in the sense that the budgeted profit is lower than the actual profit. The implication is that expenses might have been over forecasted.

Discuss the calculated variances, and provide suggestions for better cost management

From the variance, it can be deduced that while the flexed labour hour is lower than actual labour hour, the flexed labour hour does have higher cost of labour. On the same note, although the flexed overhead cost is lower than that of the actual overhead cost, it can be seen that total flexed cost is higher. This implies that the activities in the flexed budget are in essence lower than that of actual budget but it does have higher cost – and this higher cost does have negative influence on operating profit with the flexed cost having a lower operating profit than that of the actual cost.

The basic discovery from the above analysis is that the high level of rigidity in the costing measures of original budget does pave way for the difference in cost. The reason being that the original budget is in strict adherence to the defined cost plans in terms of labour hour, cost of labour and overhead cost. Also, the actual budget does show that flexibility can have positive influence on the operating profit.

On that according, it is recommended that the company should adopt beyond budgeting in its cost management approach. As defined by The Beyond Budgeting Institute (n.d), beyond budgeting is a command and control budgeting strategy with the aim of creating management models that are more adaptive and empowering. It reflects more on rethinking the way accounting managers perform their managerial duties in modern organization with increased innovation and creativity. Beyond budgeting releases managers from high control and strong bureaucracy involved in budget planning and design as it creates the right atmosphere for flexibility. On the same note, this flexibility increases responsibility and accountability from the staffs as they are offered necessary financial information to think, reflect, share, learn and potentially improve on their performance.

In summary, beyond budgeting allows for increased flexibility and this provides managers with needed opportunity to associates cost based on defined activities instead of fixing these costs. Thus, cost is incurred as activities are undertaken in the company and the management can now control cost better by deciding on increasing or decreasing cost at any given point in time.

Reference

AccountingTools.com (n.d.). Flexible budget. Available at: http://www.accountingtools.com/flexible-budget [Accessed on: 14-4-2015].

Beyond budgeting institute (n.d), “what is beyond budgeting?” Available at: http://www.bbrt.org/beyond-budgeting/bbwhat.html [Accessed on: 14-4-2015].