Activity Variance - The diffrence between a revenue or cost item in the static planning in the static planning budget and the same item in the flexible budget. An activity variance is due soley to the difference between the level of activity assumed in planning budget and the actual level of activity used in flexable budgets.
Flexible budget - A report showing estimates of what revenues and costs should have been, given the actual level of activity.
Planning budget - Abudget at the beginning of the budgeting period that is valid only for the planned level of activity.
Revenue Variance - The differnce how much the revenue should have been the actual level of activity, and the activity revenue for the period. A favorable revenue variance occurs because the revenue is higher than expected, given the actual level of activity for the period.
Spending Varince - The difference between how much a cost should have been, given the actual level of activity, and the actual amount of cost. A favorable spending variance occurs because the cost is lower the expected, given the actual level of activity for a period.
Monday, April 2, 2012
Inventory Purchases
Merchandising company would prepare a merchandise purchases budget showing the amount of good to be purchased from suppliers during the period.
Budget cost of goods .............................................XXXXX
Add desired ending merchandise inventory...........XXXXX
Total Needs............................................................XXXXX
Less beginning merchandise inventory..................XXXXX
Required Purchases................................................XXXXX
Budget cost of goods .............................................XXXXX
Add desired ending merchandise inventory...........XXXXX
Total Needs............................................................XXXXX
Less beginning merchandise inventory..................XXXXX
Required Purchases................................................XXXXX
The Production Buget
The production budget is prepared after the sales budget. The Production budget lists the number of units that must be produced to satisfy sales needs and to provide for the desired ending inventory.
Budgeted sales in case................................................................XXXXX
Add desired ending inventory of finished goods........................XXXXX
Total Needs
Less Beginning inventory of finished goods..............................XXXXX
Required production in case.......................................................XXXXX
Budgeted sales in case................................................................XXXXX
Add desired ending inventory of finished goods........................XXXXX
Total Needs
Less Beginning inventory of finished goods..............................XXXXX
Required production in case.......................................................XXXXX
The self-Imposed Buget
The initial flow of the budget data in a participative budgeting system is from lower levels of responsibility to higher levels of responsibility. Each person with responsibility for cost control will prepare his or her own budget estimates and submit them to the next higher level of management. These estimates are reviewed and consolidated as they move upward in the organization.
Self-Imposed budget - is a budget that is prepared with the full cooperation and participation of managers at all levels.
Self-Imposed budget - is a budget that is prepared with the full cooperation and participation of managers at all levels.
The basic framework of Budgeting
A budget is a detailed plan for the future that is usually expressed in formal quantitative terms. Budgets are used for two distinct purposes, planing and control. Planning involves developing goals and preparing various budgets to achieve those goals. Control involves gathering feedback to ensure that the plan is being properly executed or modified as circumstances change.
Advantages of budgeting
Budgets communicate management's plans throughout the organization.
Budgets force managers to think about the plan for the future.
The budgeting provides a means of allocating resources to those parts of the organization where they can be used most effectively.
The budgeting process can uncover potential bottlenecks before they occur.
Budgets coordinate the activities of the entire organization by integrating the plans of it's various parts.
Budgets define goals and objectives that can serve as a benchmark for evaluating subsequent performance.
Advantages of budgeting
Budgets communicate management's plans throughout the organization.
Budgets force managers to think about the plan for the future.
The budgeting provides a means of allocating resources to those parts of the organization where they can be used most effectively.
The budgeting process can uncover potential bottlenecks before they occur.
Budgets coordinate the activities of the entire organization by integrating the plans of it's various parts.
Budgets define goals and objectives that can serve as a benchmark for evaluating subsequent performance.
Monday, March 12, 2012
Common Mistakes in reation to segmented income statements
Companies often make mistakes when assigning cost to segments. they omit some costs, inappropriately assign traceable fixed costs, and arbitrarily allocate common fixed costs.
Companies do not correctly handle traceable fixed expenses on segmented income statements.
------1) They do not trace fixed expenses to segments even when it is feasible to do so.
------2) They use inappropriate allocation bases to allocate traceable fixed expenses to segments.
Failure to trace Cost Directly - Cost that can be traced directly to a specific segment should be charged directly to that segment and should not be allocated to other segments.
Inappropriate Allocation base - Some Companies us arbitrary allocation bases to allocate costs to segments. Example: Some companies allocate selling and administrative expenses on the of sales revenues. Thus, if a segment generates 20% of total company sales, it would be allocated 20% of the company's selling and administrative expenses as it " fair share".
Arbitrarily Dividing common costs among segments - The 3rd business practice that leads to distorted segment costs is the practice of assigning non-traceable costs to segments. example: Some companies allocate the common costs of the corporate headquarters building to products on segment reports
Companies do not correctly handle traceable fixed expenses on segmented income statements.
------1) They do not trace fixed expenses to segments even when it is feasible to do so.
------2) They use inappropriate allocation bases to allocate traceable fixed expenses to segments.
Failure to trace Cost Directly - Cost that can be traced directly to a specific segment should be charged directly to that segment and should not be allocated to other segments.
Inappropriate Allocation base - Some Companies us arbitrary allocation bases to allocate costs to segments. Example: Some companies allocate selling and administrative expenses on the of sales revenues. Thus, if a segment generates 20% of total company sales, it would be allocated 20% of the company's selling and administrative expenses as it " fair share".
Arbitrarily Dividing common costs among segments - The 3rd business practice that leads to distorted segment costs is the practice of assigning non-traceable costs to segments. example: Some companies allocate the common costs of the corporate headquarters building to products on segment reports
Segmented Income Statements
In the segmented income statements are statements that allow a company to makes decisions and evaluate managerial performance by creating a contribution format income statements segmented by the company's divisions, product lines, and sales channels.
To prepare a segmented income statement, variable expenses are deducted from sales to yield the contribution margin for the segment. the contribution margin tells us what happens to profits as volume changes the two components of contribution margin.
To prepare a segmented income statement, variable expenses are deducted from sales to yield the contribution margin for the segment. the contribution margin tells us what happens to profits as volume changes the two components of contribution margin.
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