What's New in Deltek Vision 7.1, Invoice Approvals, Overhead Allocation and 5 Tips & Tricks
Budgeting and Overhead Cost Allocation
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Transcript of Budgeting and Overhead Cost Allocation
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Overhead Cost Allocation
Costs are ordinarily assigned to products and
services by using a two stage process. In frststage, service department and other costs are
allocated to operating departments. In second
stage, the costs that have been assigned to
operating departments are allocated to products
and services. Here we will ocus on the frst
stage, in which service department costs areallocated to operating departments.
In the frst stage, service department costs are
allocated to operating departments by using a
unique allocation base or each service
department. The allocation base that is used toallocate a particular service department's costs
should drive those costs. !or e"ample, the
number o meals served would commonly be
used as the allocation base or caeteria costs
because the costs incurred in the caeteria are
driven to a large e"tent by the number o mealsserved.
Ideally the total cost incurred in the service
department should be directly proportional to the
allocation base. I the allocation base increases
or decreases by #$%, the service department
cost should increase or decrease by #$% as well.
&anagers also oten argue that an allocation
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base should reect as accurately as possible the
benefts that the various departments receive
rom the service department.
!or e"ample the most managers would argue
that square eet building space occupied by each
department should be used as the allocation
base or (anitorial services because both the
benefts and costs o (anitorial services tend to be
proportional to the amount o space occupied by
a department. ) given service department's costmay be allocated using more than allocation base
*see e"amples below+. !or e"ample, data
processing costs may be allocated on the basis o
C- minutes or mainrame computers and on
the basis o number o personal computers used
in each operating department.
In addition to e"planation o how to select an
allocation base, another critical actor should not
be overlooed. The allocation base should be
clear and straightorward and easily understood
by the managers to whom the costs are beingallocated.
BUDGET AND BUDGETARY CONTROL
#.) /udget is essentially a plan, a statement o
e"pected results e"pressed in numerical terms.
The process o reducing plans to defnite
numbers orces a ind o orderliness that helps
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the authority in bringing about co0ordination and
e1ective control over di1erent activities o an
organisation. Co0ordination and control leads to
methodical orecasts, setting up o some
standards and targets. 2uch standards and
targets orm the yardstics or measuring
e3ciency o various activities. /udget is thus the
most e1ective device o managerial control. It is
to plan wor and wor the plan. The latter is
more important.4ssentials o a /udget
5. The use o the /udget as a planning as well as
a control instrument has several implications. It
should be based upon actual e"pectations rather
than ideal goals. /asing on the perormance oprevious years and agreed targets o e"pected
perormances, taing into consideration the
availability o the means o production, budget is
made out in such broad details as could be
wored out with as meticulous care as possible.
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Budgetary control methods
a+ Budget
) ormal statement o the fnancial resourcesset aside or carrying out specifc activities in agiven period o time.
It helps to co0ordinate the activities o theorganisation.
)n e"ample would be an advertising budget orsales orce budget.
!" Budgetary control
) control technique whereby actual results arecompared with budgets.
)ny di1erences *variances+ are made theresponsibility o ey individuals who can eithere"ercise control action or revise the originalbudgets.
Budgetary control and res#onsi!ilitycentres$
These enable managers to monitor organisationalunctions.
A res#onsi!ility centre can be defned as anyunctional unit headed by a manager who isresponsible or the activities o that unit.
There are our types o responsibility centres6
a+ Revenue centres
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7rganisational units in which outputs aremeasured in monetary terms but are not directlycompared to input costs.
b+ Expense centres
-nits where inputs are measured in monetaryterms but outputs are not.
c+ Proft centres
8here perormance is measured by thedi1erence between revenues *outputs+ ande"penditure *inputs+. Inter0departmental salesare oten made using transer prices.
d+ Investment centres
8here outputs are compared with the assets
employed in producing them, i.e. 97I.Advantages o% !udgeting and !udgetarycontrol
There are a number o advantages to budgetingand budgetary control6
Compels management to thin about theuture, which is probably the most importanteature o a budgetary planning and controlsystem. !orces management to loo ahead, toset out detailed plans or achieving the targetsor each department, operation and *ideally+each manager, to anticipate and give theorganisation purpose and direction.
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romotes coordination and communication.
Clearly defnes areas o responsibility. 9equiresmanagers o budget centres to be maderesponsible or the achievement o budgettargets or the operations under their personalcontrol.
rovides a basis or perormance appraisal*variance analysis+. ) budget is basically ayardstic against which actual perormance is
measured and assessed. Control is provided bycomparisons o actual results against budgetplan. :epartures rom budget can then beinvestigated and the reasons or the di1erencescan be divided into controllable and non0controllable actors.
4nables remedial action to be taen asvariances emerge.
&otivates employees by participating in thesetting o budgets.
Improves the allocation o scarce resources.
4conomises management time by using themanagement by e"ception principle.
The disadvantages o% !udgeting
include
Time required . It can be very time0
consuming to create a budget, especially in a
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poorly0organi;ed environment where many
iterations o the budget may be required. The
time involved is lower i there is a well0designedbudgeting procedure in place, employees are
accustomed to the process, and the company
uses budgeting sotware. The time requirement
can be unusually large i there is a participative
budgeting process in place, since such a system
involves an unusually large number o
employees.
Gaming the system. )n e"perienced
manager may attempt to introduce budgetary
slac, which involves deliberately reducing
revenue estimates and increasing e"pense
estimates, so that he can easily achieve
avorable variances against the budget. This can
be a serious problem, and requires considerable
oversight to spot and eliminate
Blame for outcomes& I a department does
not achieve its budgeted results, the department
manager may blame any other departments that
provide services to it or not having adequately
supported his department.
http://www.accountingtools.com/questions-and-answers/what-is-participative-budgeting.htmlhttp://www.accountingtools.com/questions-and-answers/what-is-participative-budgeting.htmlhttp://www.accountingtools.com/questions-and-answers/what-is-budgetary-slack.htmlhttp://www.accountingtools.com/questions-and-answers/what-is-budgetary-slack.htmlhttp://www.accountingtools.com/questions-and-answers/what-is-budgetary-slack.htmlhttp://www.accountingtools.com/questions-and-answers/what-is-budgetary-slack.htmlhttp://www.accountingtools.com/questions-and-answers/what-is-participative-budgeting.htmlhttp://www.accountingtools.com/questions-and-answers/what-is-participative-budgeting.html
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Expense allocations& The budget may
prescribe that certain amounts o overhead costs
be allocated to various departments, and themanagers o those departments may tae issue
with the allocation methods used.
Spend it or lose it . I a department is
allowed a certain amount o e"penditures and it
does not appear that the department will spendall o the unds during the budget period, the
department manager may authori;e e"cessive
e"penditures at the last minute, on the grounds
that his budget will be reduced in the ne"t period
unless he spends all o the amounts authori;ed in
the current budget.
Only considers nancial outcomes.
/udgets are primarily concerned with the
allocation o cash to specifc activities, and the
e"pected outcome o business transactions 0 they
do not deal with more sub(ective issues, such as
the quality o products or services provided to
customers. These other issues can be stated as
part o the budget, but this is not typically done.
Strategic rigidity . 8hen a company creates
an annual budget, the senior management team
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may decide that the ocus o the organi;ation or
the ne"t year will be entirely on meeting the
targets outlined in the budget. This can be aproblem i the maret shits in a di1erent
direction sometime during the budget year. In
this case, the company should shit along with
the maret, rather than adhering to the budget.
'ro!lems in !udgeting
8hilst budgets may be an essential part o anymareting activity they do have a number odisadvantages, particularly in perception terms.
/udgets can be seen as pressure devices
imposed by management, thus resulting in6a+ bad labour relationsb+ inaccurate record0eeping.
:epartmental conict arises due to6
a+ disputes over resource allocation
b+ departments blaming each other i targets arenot attained.
It is di3cult to reconcile personal
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9esponsibility versus controlling, i.e. some costsare under the inuence o more than one person,e.g. power costs.
&anagers may overestimate costs so that theywill not be blamed in the uture should theyoverspend.
Characteristics o% a !udget
) good budget is characterised by the ollowing6
articipation6 involve as many people aspossible in drawing up a budget. Comprehensiveness6 embrace the wholeorganisation. 2tandards6 base it on established standards operormance. !le"ibility6 allow or changing circumstances. !eedbac6 constantly monitor perormance. )nalysis o costs and revenues6 this can bedone on the basis o product lines, departmentsor cost centres.
Budget organisation and administration
In organising and administering a budget systemthe ollowing characteristics may apply6
a+ Budget centres: -nits responsible or thepreparation o budgets. ) budget centre mayencompass several cost centres.
b+ Budget committee: This may consist o senior
members o the organisation, e.g. departmental
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heads and e"ecutives *with the managingdirector as chairman+. 4very part o theorganisation should be represented on the
committee, so there should be a representativerom sales, production, mareting and so on.!unctions o the budget committee include6
Coordination o the preparation o budgets,including the issue o a manual Issuing o timetables or preparation obudgets rovision o inormation to assist budgetpreparations Comparison o actual results with budget andinvestigation o variances.
c+ Budget Ocer: Controls the budgetadministration The (ob involves6
liaising between the budget committee andmanagers responsible or budget preparation dealing with budgetary control problems ensuring that deadlines are met educating people about budgetary control.
d+ Budget manual:
This document6
charts the organisation details the budget procedures contains account codes or items oe"penditure and revenue timetables the process
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clearly defnes the responsibility o personsinvolved in the budgeting system.
Budget #re#aration
!irstly, determine the principal budget actor. Thisis also nown as the ey budget actor or limitingbudget actor and is the actor which will limit theactivities o an undertaing. This limits output,e.g. sales, material or labour.
a+ 2ales budget6 this involves a realistic salesorecast. This is prepared in units o each productand also in sales value. ðods o salesorecasting include6
sales orce opinions maret research statistical methods *correlation analysis ande"amination o trends+ mathematical models.
In using these techniques consider6
company's pricing policy general economic and political conditions
changes in the population competition consumers' income and tastes advertising and other sales promotiontechniques ater sales service credit terms o1ered.
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b+ roduction budget6 e"pressed in quantitativeterms only and is geared to the sales budget. Theproduction manager's duties include6
analysis o plant utilisation wor0in0progress budgets.
I requirements e"ceed capacity he may6
subcontract plan or overtime
introduce shit wor hire or buy additional machinery The materials purchases budget's bothquantitative and fnancial.
c+ 9aw materials and purchasing budget6
The materials usage budget is in quantities. The materials purchases budget is bothquantitative and fnancial.
!actors inuencing a+ and b+ include6
production requirements planning stoc levels storage space trends o material prices.
d+ =abour budget6 is both quantitative andfnancial. This is inuenced by6
production requirements man0hours available grades o labour required
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wage rates *union agreements+ the need or incentives.
e+ Cash budget6 a cash plan or a defned periodo time. It summarises monthly receipts andpayments. Hence, it highlights monthly surplusesand defcits o actual cash. Its main uses are6
to maintain control over a frm's cashrequirements, e.g. stoc and debtors
to enable a frm to tae precautionarymeasures and arrange in advance or investmentand loan acilities whenever cash surpluses ordefcits arises
to show the easibility o management's plansin cash terms
to illustrate the fnancial impact o changes inmanagement policy, e.g. change o credit termso1ered to customers.
9eceipts o cash may come rom one o theollowing6
cash sales payments by debtors the sale o f"ed assets the issue o new shares the receipt o interest and dividends rominvestments.
ayments o cash may be or one or more o the
ollowing6
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purchase o stocs payments o wages or other e"penses purchase o capital items
payment o interest, dividends or ta"ation.
(te#s in #re#aring a cash !udget
i+ 2tep #6 set out a pro orma cash budget monthby month. /elow is a suggested layout.
)onth * )onth + )onth ,
- - -
Cash receipts
9eceipts rom debtors
2ales o capital items
=oans received
roceeds rom share issues
)ny other cash receipts
Cash payments
ayments to creditors
8ages and salaries
=oan repayments
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Capital e"penditure
Ta"ation
:ividends
)ny other cash e"penditure
Receipts less payments
Opening cash balance b! 8 > ?
Closing cash balance c! > ? @
ii+ 2tep 56 sort out cash receipts rom debtors
iii+ 2tep A6 other income
iv+ 2tep B6 sort out cash payments to suppliers
v+ 2tep 6 establish other cash payments in themonth
!igure B.# shows the composition o a masterbudget analysis.
.igure /&* Com#osition o% a master !udget
O'ERAT0NG BUDGET .0NANC0AL BUDGET
consists o60 consists o
/udget
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roduction budget /alance sheet
&aterials budget !unds statement
=abour budget
)dmin. budget
2tocs budget
+ 7ther budgets6
These include budgets or6
administration research and development selling and distribution e"penses capital e"penditures woring capital *debtors and creditors+.
The master budget *fgure B.#+ illustrates this.Dow attempt e"ercise B.#.
E1ercise /&* Budgeting 0
:raw up a cash budget or "# $ithole showing thebalance at the end o each month, rom theollowing inormation provided by her or the si"months ended A# :ecember #E>5.
a+ 7pening Cash F #,5$$.
*23+ *23,
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(ales at -+4 #er unit )AR A'R )AY 5UN 5UL AUG (E' OCT NO6 DEC 5AN .EB
5G$ 5$$ A5$ 5E$ B$$ A$$ A$ B$$ AE$ B$$ 5G$ 5$
Cash is received or sales ater A monthsollowing the sales.
c+ roduction in units6 5B$ 5$ A$$ A5$ A$ A$ A$ AB$ A#$ 5G$ 5$
d+ 9aw materials cost F
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Cultivation Irrigation !ield maintenance
Harvesting Transportation.
8ith each operation, there will be costs orlabour, materials and machinery usage.
Thereore, or e.g. harvesting, these may includeour resources, namely6
=abour60cutting0sundry
Tractors Cane trailers Implements and sundries.
Having identifed cost centres, the ne"t step willbe to mae a quantitative calculation o theresources to be used, and to urther brea thisdown to shorter periods, say, one month or threemonths. The length o period chosen is importantin that the shorter it is, the greater the controlthat can be e"ercised by the budget but the
greater the e"pense in preparation o the budgetand reporting o any variances.
The quantitative budget or harvesting may becalculated as shown in fgure B.5.
.igure /&+ 7uantitative harvesting !udget
8arvesting *st 9uarter +nd 9uarter ,rd 9uarter /th 9uarter
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=abour
Cutting nil E,$$$ tonnes #G,$$$ tonnes #$,$$$ tonnes
2undry nil A$$ man days B$ man days B$ man days
Tractors nil GA$ hours #,#$$ hours $$ hours
Cane trailers nil E,$$$ tonnes #G,$$$ tonnes #$,$$$ tonnes
Imp, K sundries nil E,$$$ tonnes #G,$$$ tonnes #$,$$$ tonnes
4ach item is measured in di1erent quantitativeunits 0 tonnes o cane, man days etc.0anddepends on individual (udgement o which is the
best unit to use.
7nce the budget in quantitative terms has beenprepared, unit costs can then be allocated to theindividual items to arrive at a budget orharvesting in fnancial terms as shown in tableB.5.
Charge out costs
In table B.5 tractors have a unit cost o F.$ perhour 0 machines lie tractors have a whole rangeo costs lie uel and oil, repairs andmaintenance, driver, licence, road ta" andinsurance and depreciation. 2ome o the costs
are f"ed, e.g. depreciation and insurance,
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whereas some vary directly with use o thetractor, e.g. uel and oil. 7ther costs such asrepairs are unpredictable and may be very high
or low 0 an estimated fgure based on paste"perience.
.igure /&, 8arvesting cost !udget
0temharvesting
Unit cost *st9uarter
+nd9uarter
,rd9uarter
/th9uarter
Total
=abour
Cutting F$. pertonne
0 G,$ #5,$$$ ,$$ 5G,5$
2undry F5.$ per day 0 $ #,#5 #,#5 A,$$$
Tractors F.$ per hour 0 B,5 ,5$ ,5$ #,55
Cane Trailers F$.# pertonne
0 #,A$ 5,B$$ #,$$ ,5$
Imp. K sundries F$.5 pertonne
0 5,5$ B,$$$ 5,$$ ,$
0 F#,5 F5, F#, FG#,B
2o, overall operating cost o the tractor or theyear may be budgeted as shown in fgure B.B.
I the tractor is used or more than #,$$$ hoursthen there will be an over0recovery on itsoperational costs and i used or less than #,$$$
hours there will be under0recovery, i.e. in the frst
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instance maing an internal 'proft' and in thesecond a 'loss'.
.igure /&/ Tractor costs
Unit rate Cost #er annum :*;444hours"
:-" :-"
!i"ed costs :epreciation 5,$$$.$$ 5,$$$.$$
=icence and insurance 5$$.$$ 5$$.$$
:river #$$.$$ per month #,5$$.$$
9epairs G$$.$$ per annum G$$.$$
Jariable costs !uel and oil 5.$$ per hour 5,$$$.$$
&aintenance A.$$ per 5$$ hours #,$$.$$
,$$.$$
Do. o hours used #,$$$.$$
Cost per hour .$
)aster !udget
The master budget or the sugar cane arm maybe as shown in fgure B.. The budget representsan overall ob(ective or the arm or the wholeyear ahead, e"pressed in fnancial terms.
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Ta!le /&< O#erating !udget %or sugar cane%arm *23/
*st 9uarter+nd 9uarter ,rd 9uarter /th 9uarter Total -
9evenue rom cane #A$,$$$ 5$,$$$ #5$,$$$ $$,$$$
=ess6 Costs
Cultivation A,5G# B,5G B5,AG ,B#G #A,A#A
Irrigation ,5 #,5E #,BA ##,A5E 5,A
!ield maintenance B,5G #5,E5A #,EE# ,5G5 B#,$$5
Harvesting 0 #,5 5, #, G#,B
Transportation 0 #B,#$$ 5B,$ #,$ B,G$$
BE,AG #$G,B#A #5E,A #$,GA5 AE5,G
)dd6 7pening valuation ,$$ #A,#G ##5,5B$ EB,5G$ ,$$
#A,#G 5B#, 5B#,E 5$#,E5 B,G
=ess6 Closing valuation #A,#G ##5,5B$ EB,5G$ E$,5E$ E$,5E$
Det crop cost 0 #5E,AA #B,AA ###,G$5 A,5
Lross surplus 0 GG,5$$ #$5,GGA ,AE ###,5A
=ess6 7verheads ,G ,AG# ,BG ,A5# 5G,$BB
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Det proftless+ *,G+ *G,GEE+ E,# A,$ ,GE
7nce the operating budget has been prepared,two urther budgets can be done, namely6
i. /alance sheet at the end o the year.
ii. Cash ow budget which shows the amount ocash necessary to support the operating budget.It is o great importance that the business has
su3cient unds to support the plannedoperational budget.
Re#orting !ac=
:uring the year the management accountant willprepare statements, as quicly as possible atereach operating period, in our e"ample, each
quarter, setting out the actual operating costsagainst the budgeted costs. This statement willcalculate the di1erence between the 'budgeted'and the 'actual' cost, which is called the'variance'.
There are many ways in which management
accounts can be prepared. To continue with oure"ample o harvesting on the sugar cane arm,management accounts at the end o the thirdquarter can be presented as shown in fgure B.G.
.igure /&> )anagement accounts ? actualcosts against !udget costs )anagementaccounts %or sugar cane %arm ,rd 9uarter
*23/
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0tem 8arvesting
,rd 9uarter Year to date
Actual Budget 6ariance Actual Budget 6ariance
=abour
0 Cutting #5,5$$ #5,$$$ *5$$+ #E,$G$ #,$ *A#$+
0 2undry B5 #,#5 AA #,B #, 5E#
Tractors E,A ,5$ *#,#5+ #A,$$ #5,E *5+
Cane trailers #,G 5,B$$ 55 5,$ A,$ #,5B
Imp K sundries B,5$ B,$$$ *5$+ G,#A G,5$ *5GA+
5,5G 5, *BE$+ BA,#G5 BA,G$$ BA
Here, actual harvesting costs or the Ard quarterare F5,5G against a budget o F5,indicating an increase o FBE$ whilst thecumulative fgure or the year to date shows anoverall saving o FBA. It appears that actualcosts are less than budgeted costs, so the
harvesting operations are proceeding within thebudget set and satisactory. However, a urtherloo may reveal that this may not be the case.
The budget was based on a cane tonnage cut o#G,$$$ tonnes in the Ard quarter and acumulative tonnage o 5,$$$. I these tonnageshave been achieved then the statement will be
satisactory. I the actual production was much
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higher than budgeted then these costs representa very considerable saving, even though only amarginal saving is shown by the variance.
2imilarly, i the actual tonnage was signifcantlyless than budgeted, then what is indicated as amarginal saving in the variance may, in act, be aconsiderable overspending.
'rice and 9uantity variances
Must to state that there is a variance on a
particular item o e"penditure does not reallymean a lot. &ost costs are composed o twoelements 0 the quantity used and the price perunit. ) variance between the actual cost o anitem and its budgeted cost may be due to one orboth o these actors. )pparent similaritybetween budgeted and actual costs may hide
signifcant compensating variances betweenprice and usage.
!or e"ample, say it is budgeted to tae A$$ mandays at FA.$$ per man day 0 giving a totalbudgeted cost o FE$$.$$. The actual cost oncompletion was F.$$, showing a saving o
F5.$$. !urther investigations may reveal thatthe (ob too 5$ man days at a daily rate oFA.$ 0 a avourable usage variance but a veryunavourable price variance. &anagement maythereore need to investigate some signifcantvariances revealed by urther analysis, which acomparison o the total costs would not haverevealed. rice and usage variances or ma(oritems o e"pense are discussed below.
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La!our
The di1erence between actual labour costs andbudgeted or standard labour costs is nown asdirect wages variance. This variance may arisedue to a di1erence in the amount o labour usedor the price per unit o labour, i.e. the wage rate.
The direct wages variance can be split into6
i+ 8age rate variance6 the wage rate was higheror lower than budgeted, e.g. using more unsilled
labour, or woring overtime at a higher rate.
ii+ =abour e3ciency variance6 arises when theactual time spent on a particular (ob is higher orlower than the standard labour hours specifed,e.g. breadown o a machine.
)aterials
The variance or materials cost could also be splitinto price and usage elements6
i+ &aterial price variance6 arises when the actualunit price is greater or lower than budgeted.Could be due to ination, discounts, alternative
suppliers etc.ii+ &aterial quantity variance6 arises when theactual amount o material used is greater orlower than the amount specifed in the budget,e.g. a budgeted ertiliser at A$ g per hectaremay be increased or decreased when the actualertiliser is applied, giving rise to a usage
variance.
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Overheads
)gain, overhead variance can be split into6
i+ 7verhead volume variance6 where overheadsare taen into the cost centres, a productionhigher or lower than budgeted will cause an over0or under0absorption o overheads.
ii+ 7verhead e"penditure variance6 where theactual overhead e"penditure is higher or lower
than that budgeted or the level o outputactually produced.
Calculation o% #rice and usage variances
The price and usage variance are calculated asollows6
rice variance N *budgeted price 0 actual price+ >actual quantity-sage variance N *budgeted quantity 0 actualquantity+ > budgeted price
Dow attempt e"ercise B.5.
E1ercise /&+ Com#utation o% la!our
variances
It was budgeted that it would tae 5$$ man daysat F#$.$$ per day to complete the tas costingF5,$$$.$$ when the actual cost was F#,.$$,being #$ man days at F#5.$ per day. Calculate6
i+ rice variance
ii+ -sage variance
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Comment briey on the results o yourcalculation.
)anagement action and cost control
roducing inormation in managementaccounting orm is e"pensive in terms o the timeand e1ort involved. It will be very wasteul i theinormation once produced is not put intoe1ective use.
There are fve parts to an e1ective cost controlsystem. These are6
a+ preparation o budgets
b+ communicating and agreeing budgets with allconcerned
c+ having an accounting system that will recordall actual costs
d+ preparing statements that will compare actualcosts with budgets, showing any variances anddisclosing the reasons or them, and
e+ taing any appropriate action based on the
analysis o the variances in d+ above.)ction*s+ that can be taen when a signifcantvariance has been revealed will depend on thenature o the variance itsel. 2ome variances canbe identifed to a specifc department and it iswithin that department's control to taecorrective action. 7ther variances might prove to
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be much more di3cult, and sometimesimpossible, to control.
Jariances revealed are historic. They show whathappened last month or last quarter and noamount o analysis and discussion can alter that.However, they can be used to inuencemanagerial action in uture periods.
@ero !ase !udgeting :@BB"
)ter a budgeting system has been in operationor some time, there is a tendency or ne"t year'sbudget to be (ustifed by reerence to the actuallevels being achieved at present. In act this ispart o the fnancial analysis discussed so ar, butthe proper analysis process taes into account allthe changes which should a1ect the utureactivities o the company. 4ven using such ananalytical base, some businesses fnd thathistorical comparisons, and particularly thecurrent level o constraints on resources, caninhibit really innovative changes in budgets. Thiscan cause a severe handicap or the businessbecause the budget should be the frst year othe long range plan. Thus, i changes are notstarted in the budget period, it will be di3cult orthe business to mae the progress necessary toachieve longer term ob(ectives.
7ne way o breaing out o this cyclicalbudgeting problem is to go bac to basics anddevelop the budget rom an assumption o no
e"isting resources *that is, a ;ero base+. This
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means all resources will have to be (ustifed andthe chosen way o achieving any specifedob(ectives will have to be compared with the
alternatives. !or e"ample, in the sales area, thecurrent e"isting feld sales orce will be ignored,and the optimum way o achieving the salesob(ectives in that particular maret or theparticular goods or services should be developed.
This might not include any feld sales orce, or adi1erent0si;ed team, and the company then has
to plan how to implement this new strategy.
The obvious problem o this ;ero0base budgetingprocess is the massive amount o managerialtime needed to carry out the e"ercise. Hence,some companies carry out the ull process everyfve years, but in that year the business canalmost grind to a halt. Thus, an alternative way isto loo in depth at one area o the business eachyear on a rolling basis, so that each sector does a;ero base budget every fve years or so.