III.+Module+8000+Explanation+and+Examples


 * III. Module 8000 Explanations and Examples efm **

//Planning and Control // A flexible budget accounts for changes in production, activities, and volumes of work. This budgeting format allows companies to identify perceived changes in production. The flexible budget has the pulse of how the company is actually doing by measuring changes over time. [][i] //Examples where flexible budgeting is useful // A static budget looks at all lines in a division or business and uses planned outputs—without regard for change. (Payroll, taxes, other maintenance are included in this budget). [][ii] The relationship of various types of budgets in planning is depicted in the exhibit shown below (Martin, James R. “Chapter 9 The Master Budget or Financial Plan”. __Maaw.info__. July 4, 2011 <[]>)[iii].
 * __How Does Budgeting Affect Business? __**
 * Budgeting is a tool that allows a company to set a course of action in order to maximize their performance.
 * __Flexible Budgets __**
 * 1) Product integration: your company has developed a new process. You have identified that you can produce but you need to figure out at what levels.
 * 2) Industries that accommodate seasonal products, i.e. candy manufacturers (Christmas, Easter, & Halloween), or outdoor equipment manufacturers.
 * __Static Budgets __**

<span style="font-family: 'Times New Roman','serif';">(b) **<span style="font-family: 'Times New Roman','serif';">Variable rate of input per value of change (x) value **<span style="font-family: 'Times New Roman','serif';">.
 * <span style="font-family: 'Times New Roman','serif';">(a) ****<span style="font-family: 'Times New Roman','serif';">Fixed costs **

<span style="font-family: 'Times New Roman','serif';">Formula to figure **//<span style="font-family: 'Times New Roman','serif';">y=a+bX //**

<span style="font-family: 'Times New Roman','serif';">Think of flexible budgeting as a prediction to the costs for an organization. <span style="font-family: 'Times New Roman','serif';">It is a cost function in the form of: **<span style="font-family: 'Times New Roman','serif';">y= a+bX ** <span style="font-family: 'Times New Roman','serif';">y=mixed/variables to be determined <span style="font-family: 'Times New Roman','serif';">x=measures of activities (labor, volume, etc) <span style="font-family: 'Times New Roman','serif';">a=fixed costs <span style="font-family: 'Times New Roman','serif';">b=the variable rate incurred from unit of x

<span style="color: #000000; font-family: 'Times New Roman','serif';"> Read more: [] <span style="color: #000000; font-family: 'Times New Roman','serif'; font-size: 14.6667px;">[iv]

<span style="font-family: 'Times New Roman','serif';">As learned in economics, a decrease in the price of a competitor’s product can increase the consumption in the quantity of a substitute**.**([])<span style="font-family: 'Times New Roman','serif'; font-size: 14.6667px;">[v] <span style="font-family: 'Times New Roman','serif';">A flexible budget can only be determined after a period has passed. **__<span style="font-family: 'Times New Roman','serif';">Varying Activity Flexible Budget __** <span style="font-family: 'Times New Roman','serif';">BAR Brand Company, has the following variable costs per unit produced: <span style="font-family: 'Times New Roman','serif';">BAR Brand Company produces press on stickers
 * __<span style="font-family: 'Times New Roman','serif';">Creating a flexible budget __**
 * 1) <span style="font-family: 'Times New Roman','serif';">First determine the known costs per unit and the budgeted sales price for units produced.
 * 2) <span style="font-family: 'Times New Roman','serif';">Determine the budgeted amounts of fixed costs
 * 3) <span style="font-family: 'Times New Roman','serif';">Calculate how much was actually produced
 * 4) <span style="font-family: 'Times New Roman','serif';">Complete the budget using steps 1 & 2 and accounting for the actual volume produced in step 3.
 * <span style="font-family: 'Times New Roman','serif';">Information: **
 * __<span style="font-family: 'Times New Roman','serif';">______________________ __**
 * <span style="font-family: 'Times New Roman','serif';">Direct Materials .15 **
 * <span style="font-family: 'Times New Roman','serif';">Direct Labor .10 **
 * <span style="font-family: 'Times New Roman','serif';">Variable overhead: **
 * <span style="font-family: 'Times New Roman','serif';">Supplies: .05 **
 * __<span style="font-family: 'Times New Roman','serif';">Power: __**__<span style="font-family: 'Times New Roman','serif';"> **.01** __

<span style="font-family: 'Times New Roman','serif';">Budgeted fixed overhead costs per quarter include supervision of $35,000, depreciation of $10,000, and rent of $21,000. <span style="font-family: 'Times New Roman','serif';">Production levels: <span style="font-family: 'Times New Roman','serif';">1,000,000 units, 1,500,000 units, and 2,000,000 units <span style="font-family: 'Times New Roman','serif';">Solution: <span style="font-family: 'Times New Roman','serif';">1. __<span style="font-family: 'Times New Roman','serif';">_____________________________________________________________________________________ __ <span style="font-family: 'Times New Roman','serif';"> Direct materials $ .15 $ 150,000 $ 225,000 $ 300,000 <span style="font-family: 'Times New Roman','serif';"> Direct labor .10 100,000 150,000 200,000 <span style="font-family: 'Times New Roman','serif';"> Supplies .05 50,000 75,000 100,000 <span style="font-family: 'Times New Roman','serif';"> Power __.01__ __10,000__  __15,000__  __20,000__ <span style="font-family: 'Times New Roman','serif';">Total variable costs __$ .31__ __$ 310,000__ __$ 465,000__ __$ 620,000__ <span style="font-family: 'Times New Roman','serif';"> Supervision $ 35,000 $ 35,000 $ 35,000 <span style="font-family: 'Times New Roman','serif';"> Depreciation 10,000 10,000 10,000 <span style="font-family: 'Times New Roman','serif';"> Rent __21,000__  __21,000__  __21,000__ <span style="font-family: 'Times New Roman','serif';">Total fixed costs __$ 66,000__ __$ 66,000__ __$ 66,000__ <span style="font-family: 'Times New Roman','serif';">Total production costs __$ 376,000__ __$ 531,000__ __$ 686,000__ __<span style="font-family: 'Times New Roman','serif';">_____________________________________________________________________________________ __
 * 1) <span style="font-family: 'Times New Roman','serif';">Prepare a flexible budget for all levels of production
 * 2) <span style="font-family: 'Times New Roman','serif';">What is the per-unit cost for each of the production levels in step 1?
 * __<span style="font-family: 'Times New Roman','serif';">Varying Activity Flexible Budget BAR Brand Company __**
 * <span style="font-family: 'Times New Roman','serif';">Variable Cost Range of Production in Units **
 * <span style="font-family: 'Times New Roman','serif';"> Per Unit **<span style="font-family: 'Times New Roman','serif';"> **__1,000,000__** **__1,500,000__** **__2,000,000__**
 * <span style="font-family: 'Times New Roman','serif';">Production Costs: **
 * <span style="font-family: 'Times New Roman','serif';">Variable: **
 * <span style="font-family: 'Times New Roman','serif';">Variable overhead: **
 * <span style="font-family: 'Times New Roman','serif';">Fixed overhead **<span style="font-family: 'Times New Roman','serif';">:

<span style="font-family: 'Times New Roman','serif';">2. Per-unit product cost @ 1,000,000 units = $ 376,000/1,000,000 = $ .38 (rounded) <span style="font-family: 'Times New Roman','serif';"> Per unit product cost @ 1,500,000 units = $ 531,000/1,500,000 = $ .35 (rounded) <span style="font-family: 'Times New Roman','serif';"> Per unit product cost @ 2,000,000 units = $ 686,000/2,000,000 = $ .34 (rounded) **__<span style="font-family: 'Times New Roman','serif';">Actual Activity Flexible Budget __** <span style="font-family: 'Times New Roman','serif';">BAR Brand Company produced 2,000,000 units and has the following actual costs in the first quarter: __<span style="font-family: 'Times New Roman','serif';">________________________________ __ <span style="font-family: 'Times New Roman','serif';">Direct materials $ 307,000 <span style="font-family: 'Times New Roman','serif';">Direct labor 200,000 <span style="font-family: 'Times New Roman','serif';">Supplies 91,000 <span style="font-family: 'Times New Roman','serif';">Power 18,000 <span style="font-family: 'Times New Roman','serif';">Supervision 33,000 <span style="font-family: 'Times New Roman','serif';">Depreciation 10,000 __<span style="font-family: 'Times New Roman','serif';">Rent 22,000 __
 * <span style="font-family: 'Times New Roman','serif';">Information: **


 * 1) <span style="font-family: 'Times New Roman','serif';">Prepare a performance report for actual costs for the first quarter, compared to the flexible budget amounts.
 * 2) <span style="font-family: 'Times New Roman','serif';">What is the actual per-unit cost? What is the flexible budgeted per-unit product cost?

<span style="font-family: 'Times New Roman','serif';">Solution: **__<span style="font-family: 'Times New Roman','serif';">Actual Activity Flexible Budget BAR Brand Company __** <span style="font-family: 'Times New Roman','serif';">1. <span style="font-family: 'Times New Roman','serif';"> **Supplies** 91,000 100,000 (9,000) F <span style="font-family: 'Times New Roman','serif';"> **Power** 18,000 20,000 (2,000) F <span style="font-family: 'Times New Roman','serif';"> **Supervision** 33,000 35,000 (2,000) F <span style="font-family: 'Times New Roman','serif';"> **Depreciation** 10,000 10,000 0 <span style="font-family: 'Times New Roman','serif';"> **Rent**  __22,000__  __21,000__  __1,000 U__
 * <span style="font-family: 'Times New Roman','serif';"> Actual Budgeted Variance **
 * <span style="font-family: 'Times New Roman','serif';">Units produced **<span style="font-family: 'Times New Roman','serif';"> 2,000,000 2,000,000 0
 * <span style="font-family: 'Times New Roman','serif';">Direct materials cost **<span style="font-family: 'Times New Roman','serif';"> $ 307,000 $ 300,000 $ 7,000 U
 * <span style="font-family: 'Times New Roman','serif';">Direct labor **<span style="font-family: 'Times New Roman','serif';"> 200,000 200,000 0
 * <span style="font-family: 'Times New Roman','serif';">Overhead: **
 * <span style="font-family: 'Times New Roman','serif';">Variable: **
 * <span style="font-family: 'Times New Roman','serif';">Fixed: **
 * <span style="font-family: 'Times New Roman','serif';">Total **<span style="font-family: 'Times New Roman','serif';"> __$ 681,000__ __$ 686,000__ __$ (5,000) F__

<span style="font-family: 'Times New Roman','serif';">2. <span style="font-family: 'Times New Roman','serif';"> Actual per-unit cost = $ 681,000/2,000,000 = $ .3405 <span style="font-family: 'Times New Roman','serif';">Budged per-unit cost = $ 686,000/2,000,000 = $ .343


 * <span style="font-family: 'Times New Roman','serif';">Variances: **
 * 1) **<span style="font-family: 'Times New Roman','serif';">(F) Favorable: beats expectation based on results **
 * 2) **<span style="font-family: 'Times New Roman','serif';">(U) Unfavorable: More than expected based on results **


 * __<span style="font-family: 'Times New Roman','serif';">Advantages of Flexible Budgeting __**


 * <span style="font-family: 'Times New Roman','serif';">Accounts for increased or decreased activity changes or the “//what if//” equation.
 * <span style="font-family: 'Times New Roman','serif';">Evaluates overall production performance for management.

<span style="font-family: 'Calibri','sans-serif'; font-size: 13.3333px;">[i] <span style="font-family: 'Times New Roman','serif';">[]

<span style="font-family: 'Calibri','sans-serif'; font-size: 13.3333px;">[ii] <span style="font-family: 'Times New Roman','serif';">[]

<span style="font-family: 'Calibri','sans-serif'; font-size: 14.6667px;">[iii] <span style="font-family: 'Times New Roman','serif';">(Martin, James R. “Chapter 9 The Master Budget or Financial Plan”. __Maaw.info__. July 4, 2011 <[]>) <span style="font-family: 'Times New Roman','serif'; font-size: 14.6667px;">[iii] <span style="font-family: 'Times New Roman','serif';">. <span style="font-family: 'Calibri','sans-serif'; font-size: 13.3333px;">[iv] <span style="color: #000000; font-family: 'Times New Roman','serif'; font-size: 16px;"> []

<span style="font-family: 'Calibri','sans-serif'; font-size: 13.3333px;">[v] <span style="font-family: 'Times New Roman','serif';">[]