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Discussion: Capital Budgeting and How to Create Operating Budgets

Variance Analysis:

Write an analytical summary of your learning outcomes from chapters 9 and 10. In addition to your analytical summary, address the following:

1.     As a manager, discuss how you would use or have used the concepts presented in chapters 9 and 10.

2.     Why might managers find a flexible-budget analysis more informative than static-budget analysis?

3.     How might a manager gain insight into the causes of flexible-budget variances for direct materials, labor, and overhead? Provide at least one numerical example to support your thoughts.

Instructions:

Completed the assignment by over 550 words and references.

- Read and respond to at least 3 of your classmates' posts.(Below posted my classmate discussions) Read a selection of your colleagues' postings. Respond to at least 3 of your classmates’ posts. (Each response should be 150 words, It should include the stuff like supporting their discussion and  

Study Materials Link:

TextBook: https://saylordotorg.github.io/text_managerial-accounting/index.html

• Lesson Lecture

• Video-1: Capital BudgetingURL- https://www.youtube.com/watch?v=TrKVj_wLgUc

• Video-2: Capital BudgetingURL- https://www.youtube.com/watch?v=QRh0tiG2lVk

• Video: Sales BudgetURL- https://www.youtube.com/watch?v=frCX_bsFsao

• Video: Master Budget/Operating BudgetsURL- https://www.youtube.com/watch?v=Wy9MGFjS7ZA

Use the following links to study Module 5 topics

Capital Budgeting Analysis

https://saylordotorg.github.io/text_managerial-accounting/s12-how-is-capital-budgeting-used-.html

Analysis of Operating Budgets:

https://saylordotorg.github.io/text_managerial-accounting/s13-how-are-operating-budgets-crea.html

3-Clasmate discussion

Discussion1:

by Srikanth Jagini - Wednesday, 6 May 2020, 4:57 PM

Analytical summary

Every organization always wants to create a budget that is flexible and more relevant for the appropriate outcome. The flexible budget is nothing but a budget or list of expenses that occur during a year and it controls the potential emergencies and mitigates the loss of the business. According to Yuzvovich, Korogodina & Azisova (2018), it has been stated that the various problems of budgets made the industrial workflow decreasing and its impact creates the industrial dislocation, a flexible budget is an actual solution and in mitigates the loss of industrial productivity. The flexible budget provides the necessary adjustment when any type of change occurred in the organization and it increases the productivity or capability of the business. Analysis of the performance of the workers and laborers is more important for the organizational perspective. Variance in the flexible budget is occurred due to lack of control and lack of using the materials and poor remuneration to the workers and most importantly by corruption in financial areas. With respect to Junita (2018), it has been stated that the variance in the budget occurred due to moderator of legislative, it influences the revenue budget and it negatively affects.   The standard cost is prepared based on the present condition of the organization and its daily goal is to face the future perspectives and prepare a cost-based budget for the organization.

Process of using the flexible budget and standard cost

Corporate strategies were always very helpful for the development of the organizations and their productivity. Managers always focus on the operational activity of the organization and determine the per day cost of the organization. The management provides the structure of the budget to the managers and invests some amount for the completion of the operation. The budgeted amount is very relevant and every manager should operate his or her activity with this. That moment every manager consults with the accountant and collect the amount for operation if any variance arises then the manager consults with the accountant and labor also. Management created the budget based on the manager’s idea, thought, and its effectiveness. Standard costs are prepared based on the operational cost and daily operating cost. The future perspectives may be fruitful or not, but the manager will evaluate the operation by the proper making of resolution. Any type of variances can come in the future, but as a manager, it is necessary to tackle the problems and provide some solutions based on the budgeted variance. Analyzing the performance of the workers and laborers, every manager will understand the variance cause and as well, as realize the potential solutions without changing the allocated budget.

Analysis of flexible budget than the static budget 

Most of the current organizations face different types of risks and it affects negatively the organization. Managers always verify the budget and its estimation by comparing the budget with the actual performance by using a flexible budget. Changes occurred due to changes in the organizational structure or other aspects of the organization (Garrison, Noreen, Brewer & McGowan, 2010). The flexible budget provides the differences and a better insight than a static budget. Global competition always enhances the level of thought and innovation of ideas, as a manager, it is necessary to identify the mistake and flaw in the budgeting process. The flexible budget highlights such variance and the causes of such variances.

Gaining the reason for a variance by the manager

Variation can come due to the poor implementation of managerial strategies. Managers always recheck the differences between the estimated cost and the actual cost that occur in the business operation. This variance may originate for the change in the price of materials, change in the per-unit cost of labor, and can lower its estimated revenue earnings due to higher production cost

For Example- suppose the budgeted labor cost is $10000, raw element $20000 and variable Factory Overhead is $30000, and thus the total budget production cost is $50000. Now the actual production cost required comes out to be $60000, rest $10000 is the variance. Managers always try to analyze this variance; which may result due to lower estimated per unit cost of material or higher actual variable overhead. This will assist the manager in future budgeting.

Classmate-2 Discussion:

by Sukesh Anapati - Wednesday, 6 May 2020, 12:07 PM

Q. Analytical Summary

Chapter 9

In this chapter, the author discusses a new concept in budgeting which is becoming more mainstream. Flexible budgets are live budgets which companies use today to account for various budgetary inputs which have a tendency to change and this can mess up all pre-existing calculations and estimates. Flexible budgets help managers derive budgets which are closer to estimates after accounting for changes which helps them better publish their results and assess their financial situation more accurately.

Chapter 10

Standard costing and variance is a tool used by managers to accurately track their actual inputs like direct material and labor against a standard derived over calculating the past trends on the input costs. By closely monitoring the variances, the managers can track the excesses and savings in the inputs used in production and take corrective actions as necessary. Standard costing and variance analysis add into the flexible budget which may have a ripple effect on the other budgetary inputs allowing management to report more accurate numbers.

Q. As a manager, discuss how you would use or have used the concepts presented in chapters 9 and 10.

As a manager, the primary use of flexible budgets is to plan for the upcoming period of time the budget has been prepared for. It allows managers to assign resources accurately while allowing them to have buffers for contingencies should any inputs change at all.

A standard costing and variance approach allows a manager to accurately track inputs going into production i.e. direct material and labor, compare it against the expected standards of production and assess the differences to find out the variance and assess the reasons for the same. This allows them to track and control costs of production for goods produced, which become a major input into the flexible budget and helps with managing the greater budget.

Q. Why might managers find a flexible-budget analysis more informative than static-budget analysis?

Managers find flexible budgets more informative due to the following:

· A big advantage is the fact that flexible budgets allow a company to account for varied costs and margins at different levels of production. This allows them to identify the optimal level of production and sales as well the most pessimistic level and allows them to account for contingencies.

· Flexible budgets allow better cost controls since it accurately calculates variances not only in revenues but also to the input costs which allows for accurate reporting of the numbers and thus better preparation for adverse situations.

· The flexible budget constantly monitors the data and updates the plan with the latest numbers. This keeps management informed all the time and they can pre empt any changes in the environment and take appropriate corrective actions rather than be reactive in nature.

Q. How might a manager gain insight into the causes of flexible-budget variances for direct materials, labor, and overhead? Provide at least one numerical example to support your thoughts.

A flexible budget allows a manager to get a real time update on the financial situation of the company which is highly accurate. Due to this, the managers can properly control their production activities and ensure that the standard costs can be maintained to the maximum. Thus the numbers are more accurate and it ensures accurate reporting.

References:

Oyadomari, J. C. T., Afonso, P. S. L. P., Dultra-de-Lima, R. G., Mendonça Neto, O. R. R., & Righetti, M. C. G. (2018). Flexible budgeting influence on organizational inertia and flexibility. International Journal of Productivity and Performance Management, 67(9), 1640-1656.

Vesty, G., & Brooks, A. (2017). St George Hospital: Flexible Budgeting, Volume Variance, and Balanced Scorecard Performance Measurement. Issues in Accounting Education, 32(3), 103–116. https://doi.org/10.2308/iace-51588

Hiroyuki Itami. (1975). Multi-Factor Flexible Budgeting. Hitotsubashi Journal of Commerce and Management, 10(1 (10)), 13. Retrieved from\http://search.ebscohost.com/login.aspx?direct=true&AuthType=sso&db=edsjsr&AN=edsjsr.43294824

Classmate3 Discussion---

by Sravanth Pilli - Thursday, 30 April 2020, 11:56 PM

Both the chapters include the topics which are very important for the management professional. In any organization important terms to take care of are flexible budgeting and reporting. When there are different types of budgeting available if your organization falls under flexible budgeting chapter 9 taught me that, once budgeting done reporting is generated. Learned about making report which has activity and spending variances. After this learned about creating performance reporting which combines activity, revenue and spending variances in one. Some organizations while preparing budgeting user more than one cost driver, but now I can create flexible budgeting with just one cost driver. Also, chapter has listed the common mistake that organization do while making flexible budgeting like assuming all costs are fixed or all costs are variable. Now that I know these errors, I will assume all costs are fixed. Understanding the usual mistakes done while creating performance report is the knowledge that I gained will be helpful to me every day at work. [Bragg, S 2019].

As a manager, I would use a flexible budget to determine how changes in activity within the production department affect costs. I would evaluate the overall performance by comparing the actual costs and the budgeted costs (Garrison, Noreen, & Brewer, 2018, pp 415). On the other hand, I would use quantity standards to specify the amount of input to make a product. Also, I would use price standards to determine the amount of money that should be paid for every unit of output. This would be vital in making sure the available resources are fully maximized in manufacturing. 

Managers might find a flexible-budget analysis more informative than static-budget analysis because flexible-budget analysis compares the actual costs to budgeted costs and actual revenues to budgeted revenues of a similar level of output, unlike the static-budget analysis. Additionally, flexible-budget analysis assists managers in gaining more informed insights on the actual causes of variances, unlike the static budgets. 

A manager can gain insights into the causes of the variances in a flexible budget for direct labor, materials, and overheads by making adjustments for the level of activity. This is the only way a manager can interpret the discrepancies between the actual costs and the budgeted costs.

Learning only flexible budgeting is not enough. Standard costs and variances play as important part as other factors. When the organization’s revenue is dependent on the sell of a product learning how to compute direct Materials prices are crucial. Along with learning computations of direct material, keeping track of quantity variances by the standards. Variance analysis has two factors to take care of, Price variance and Quantity variance. Price variance includes three things, materials price, labor rate and VOH rate variance. On the other hand, Quantity variance includes Material quantity, Labor efficiency and VOH efficiency variances. Learning about variable manufacturing overhead variances is also necessary. Equations which are used to determine this are following 

VMRV = (AH x AR) – (AH - SR)

VMEV = (AH x SR) – (SH - SR)

There are advantages and disadvantages of everything. Suppose standard costs and variances has advantage like it simplifies the bookkeeping in the large amount, it gives a cost which sets a benchmark which is used I. promoting economy and efficiency. On the negative side with the standards, continuous improvement is required to survive the fast environment. 

As a manager, I will be building flexible budget in my organization by first identifying fixed costs and differentiate it from budget model. List down variable costs. Will construct a budget model in which fixed costs are not changeable, whereas variable costs are percentage of the activity. In the model then enter actual activity measures. At the end enter resulting flexible budget. 

I find flexible budget more useful over static due to couple of reasons. Main reason is flexible budgets will give the data about budgeted products like price and how many products should be sold etc. 

Let me give an example to calculate Overhead:

Suppose I want to calculate VMRV.

For 1.2 hours per parks * 2000

AH * AR = 2500 * 4.20 = 10500

AH * SR =. 2500 * 4.00 = 10000

VMRV = 2500 (4.20 – 4.00)

= 2500 (0.20)

= $500

References : 
Bragg, S. Published on March 14, 2019 Retrieved from 'https://www.accountingtools.com/articles/2017/5/17/flexible-budget '

Retrieved from 'https://smallbusiness.chron.com/would-company-flexible-budget-variance-informative-34699.html'

Garrison, R. H., Noreen, W. E., & Brewer, C. P. (2018). Managerial Accounting, 6thEdition. McGraw Hill Education