Difference Between Fixed Budget And Flexible Budget
Choice “A” is correct. A flexible budget is a budget prepared at different levels of operating activity. It is appropriate for any activity that has variable costs. It is not necessary for the control of fixed costs since fixed costs do not vary with changes in the level of activity.Choice “c” is incorrect. Both of these budgets have variable cost components, so flexible budgets would be meaningful at different levels of activity.Choice “d” is incorrect.
Without determining the proper amount to save and spend each month, it can be easy to fall into credit card debt or incur other adverse financial penalties. For those who fluctuate in monthly expenditures, flexible budgeting can be a great solution but there are also some drawback to this practice. C. Control of direct materials and direct labor but not selling and administrative expenses. Which of the following should have the strongest cause and effect relationship with overhead costs? Non-value-added costs.
Thus it becomes difficult for the experts to prepare Flexible budgets. In case of a business which carries their entire work with the help of laborers. The laborers’ availability is a critical factor for these types of companies. Therefore it helps the management to accurately know about their productivity and output, for example, jute factories, handloom industries, etc.
A marketing budget includes expenses incurred for promotion and sales. Some of these items, such as sales commissions or sample promotional products change with activity level. Direct material usage is directly dependent on activity cash basis level. Since a flexible budget would be appropriate for both a marketing and a direct materials usage budget, answer is correct. A flexible budget is a revised master budget based on the actual activity level achieved for a period.
Advanced flexible budget. Expenditures may only vary within certain ranges of revenue or other activities; outside of those ranges, a different proportion of expenditures https://online-accounting.net/ may apply. A sophisticated flexible budget will change the proportions for these expenditures if the measurements they are based on exceed their target ranges.
A Flexible Budget Is Appropriate For A
Atlanta Enterprises incurred $828,000 of fixed overhead during the period. During that same period, the company applied $845,000 of fixed overhead to adjusting entries production and reported an unfavorable budget variance of $41,000. How much was Atlanta’s budgeted fixed overhead? Not enough information to judge.
Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com.
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Budgets are helpful but they can also become oppressive if an individual consistently cannot stay within the limits or passes on opportunities in order to save money. By designing a budget with flexibility in mind, you won’t find yourself stressed out at the end of every month or telling your friends you can’t join them all the time. Just be sure not to use it an excuse to lose the boundaries entirely.
The new budget for sales commissions is $10,500 ($262,500 sales times 4%), and the new budget for delivery expense is $1,750 (17,500 units times 10%). These are added to the fixed costs of $12,500 to get the flexible budget amount of $24,750. Actual net income is unfavorable compared to the budget. What is not known from looking at it is why the variances occurred. For example, were more units sold? Was the selling price different than expected? Were costs higher?
In the simplest terms, a flexible budget can be described as an end of period actual accounting of expenses on which to form a comparison with the original static budget. Flexible budgets are one way companies deal with different levels of activity. A flexible budget provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a number of static budgets.
Hence flexible budget is suitable for Marketing budget and also for Direct Materials Usage Budget. Some companies have so few variable costs of any kind that there is little point in constructing a flexible budget. Instead, they have a massive amount of fixed overhead that does not vary in response to any type of activity. In this situation, there is no point in constructing a flexible budget, since it will not vary from a static budget. Usage in variable cost environment. Fixed Budget is mainly based on assumptions which are unrealistic and so this is not applicable to business concerns, but if we talk about Flexible Budget, it is more practicable.
Multiple Choice Questions 38 What Is Budgetary Control? A. Another Name For A Flexible Budget B. Th
As shown in the above table, the accurate allowance is computed to be $8,880. Let’s suppose the production machinery had to operate for 4,500 hours during February. According to this data, the monthly flexible budget would be $35,000 + $8 per MH. Its production equipment operates, on average, between 3,500 and 6,500 hours per month.
Thus, a flexible budget is particularly appropriate for control of direct labor and direct materials , but is not necessary for control of fixed factory overhead. By definition, overhead costs do not change as activity levels change. A significant downfall to the flexible budget, however, is that it cannot be created until some sales figures have first been generated. This means that a flexible budget is initially based on the performance levels of a past quarter’s static budget.
He also has a professional background in the information-technology industry as a support technician. Much of Mueller’s writing has focused on the subjects of business and economics. Total net income changes as the amount for each line on the income statement changes. The net variance in this example is mainly due to lower revenues. If revenue comes in lower than anticipated at just $400,000, then the marketing budget will automatically reduce based on that change in revenue. At $400,000, the marketing budget would reduce to $60,000.
The original budget assumed 17,000 Pickup Trucks would be sold at $15 each. To prepare the flexible budget, the units will change to 17,500 trucks, and the actual sales level and the selling price will remain the same. The $262,500 is 17,500 trucks times $15 per truck. The variance that exists now is simply due to price. Given that the variance is unfavorable, management knows the trucks were sold at a price below the $15 budgeted selling price. The flexible budget uses the same selling price and cost assumptions as the original budget. Variable and fixed costs do not change categories.
Static Budget Vs Flexible Budget
What will cause the variable-overhead efficiency variance? Full or partial utilization of major equipment resources.
Budgeted variable overhead cost per unit + budgeted fixed overhead cost. + budgeted fixed overhead costs. d on the budgeted cost information from steps 1 and 2, and the actual volume of output from step 3. Marketing a flexible budget is appropriate for budget includes expenses incurred for promotion and sales. Many items appearing in marketing budget change with the level of activity. Direct Material usage budget is directly dependent on activity level.
The variance would be the same amount as the labor efficiency variance. None of the above. This approach varies from the more common static budget, which contains nothing but fixed amounts that do not vary with actual revenue levels. This means that the variances will likely be smaller than under a static budget, and will also be highly actionable. A static budget is generally used as a projection tool for estimating business expenses within a given period of time. Discrepancies resulting from the fluctuating cost of raw materials or initial budgeting errors appear on a static budget as static budget variance. For the sake of simplicity, it can help to think of a static budget as a projection budget.
The marketing budget would have variable costs, making a flexible budget appropriate for control over marketing costs.Choice “b” is incorrect. The direct materials usage budget includes variable costs, making a flexible budget appropriate for control over direct material usage costs. Smithville uses labor hours to apply variable overhead to production.
- However, a flexible budget is necessary to control direct materials and direct labor if the actual activity level differs from the static budget activity level.
- The requirement is to determine whether a flexible budget is appropriate for a marketing and/or a direct material usage budget.
- To control fixed costs, the use of static budget is appropriate, not necessarily the use of flexible budget.
- A flexible budget is necessary to control direct materials and direct labor if the actual activity level differs from static budget activity level.
- B. Fixed costs are the same for any level of activity within the relevant range.
- In fact, total fixed costs are the same in a flexible budget as they are in the static budget.
Value-added costs. Variable costs are usually shown in thebudgetas either a percentage of total revenue or a constant rate per unit produced. C- Control of direct labor and direct materials but not selling and administrative expenses. These points make the flexible budget an appealing model for the advanced budget user. However, before deciding to switch to the flexible budget, consider the following countervailing issues. Variance Analysis provides useful information as each cost is analyzed according to its nature.
We have noticed that the recovery rate (Budgeted hrs/Total expenses) at the activity level of 70 % is $0.61 per hr. If a flexible budget is appropriate for the factory works hrs in a particular month, the allowances @ $0.61 will come put to be $9,760, which is not correct.
Cost Ascertainment is also not possible in case of fixed budget if the actual and budgeted levels of activity vary and the same can be easily determined in the case of a flexible budget. If, however, the cost was identified as a fixed cost, no changes are made in the budgeted amount when the flexible budget is contra asset account prepared. Differences may occur in fixed expenses, but they are not related to changes in activity within the relevant range. Selling Expenses. The original budget for selling expenses included variable and fixed expenses. To determine the flexible budget amount, the two variable costs need to be updated.