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Budget

A budget is quantitative expression of proposed plan of action by the management for the specified

period. It also aids to coordinate what needs to be done to implement the plan. A budget typically

include both financial and non financial aspect of the plan

A financial budget quantifies management expectation regarding income, cash flows and financial

position.

Static budget

The static budget or master budget is based on the level of output planned at the start of the budget

period. The master budget is called a static budget because the budget for the period is developed

around a static planned output level.

Flexible budget

A flexible budget calculates budgeted revenue and budgeted costs based on the actual output in the

budget period. The flexible budget is prepared at the end of the period.

The difference between the static budget and flexible budget is that the static budget is prepared for the

planned output where as the flexible budget is based on the actual output.

Budgeting cycle

The budgeting cycle is typically the processes or the steps taken during the course of the budget period.

The various steps would comprise the past performance, anticipated changes, assumption for thebudget period etc.

Advantages

The advantages of budget are

It promotes coordination and communication within the company It provides framework for judging performance. It motivates managers and other employees

Time coverage of budget

Budgets have typically a set period such as a month, qty and or year.

The set period can also be broken into sub period for example. A twelve month cash budget can be

broker into 12 monthly periods.

The most frequently used budget period is one year which sub divided into months and quarters.

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A budget could also be rolling budget where a month, qtr or year to the period is added.

Variance

A variance is difference between actual result and expected performance the expected performance

also called budgeted performance which is the point of reference for making comparison.

Variances lie at the point where planning and control function come together. It also enables the

management to focus attention on the area that are not operating as expected

Variance is also used for performance evaluation and to motivate managers to perform.

Sometimes variances also suggest the company should consider a change in the company.

Static budget variance

A static budget variance is the difference between the actual result and the corresponding budget

amount in the static budget.

A favorable variance has the effect when considered in isolation, of increasing operating income

relative to the budgeted amount.

An unfavorable variance has the effect, when viewed in isolation of decreasing operating income

relative to the budgeted amount. Unfavorable variance area also called adverse variance.

Sales volume variance

Sales volume variance is the difference between a flexible budget amount and the corresponding static

budget amount.

Sales budget variance = (flexible budget amount - static budget amount)

The flexible budget variance

The flexible budget variance is the difference between an actual result and the corresponding flexible

budget amount.

Flexible budget variance= (Actual result flexible budget amount)

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Price variance

A price variance is the difference between actual price and budget price multiplied by actual quantity,

such as direct material purchased or used.

Price variance= (actual price of inputbudgeted price of input) x actual quantity of input

Efficiency variance

Efficiency variance is the difference between actual quantity of input and the budgeted qty of input

multiplied by budgeted price.

The idea here is that the company is inefficient if it uses larger qty of input than the budgeted qty.

Conversely the company is efficient if it uses a smaller quantity of input than the budgeted qty.

Efficiency variance= (actual qty of input used budgeted qty of input allowed for actual output) x

budgeted price of input

Example

Information regarding elegance 2009

Particulars Static budget amount Actual result1 Units of elegance produced and sold 180000 151200

2 Batch size (units per batch) 150 140

3 Number of batches(line1/line2) 1200 1080

4 Material handling labor hrs per batch 5 5.25

5 Total Material handling labor hrs(line3xline4) 6000 5670

6 Cost per material handling labor hr Rs140 Rs145

7 Total materials handling labor costs (line5xline6) Rs 840000 Rs 822150

Flexible budget variance= (actual costs

flexible budget cost)

= (5670 hrs x 145 per hr)-(5040 hrs x Rs140 per hrs)

=Rs 822150-Rs 705600

= Rs 116550 unfavorable

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