Managemen Accountine Scanned with CamScanner1 Fixed ang flexible budgets own as the fed budge {0 2 fixed master tugs 4 lowing. Will be mace ifthe situation so demands. The term ‘fixed’ means the following is timated volume of ne tone tn tine tne rt rg May differ from budgeted volumes. (b) When actual volumes of production and sales during a control period (month four weeks or | Quarter) are achieved, a fixed budget is not adjusted (in retrospect) to represent\a new target for / the new levels of activity. The Major purpose of a fixed budget lies in its use at the planning stage, when it seeks define the broad. ‘objectives of the organisation. 1.2 Flexible budgets Obs A FLEXIBLE BUDGET is @ budget which, by recognising different cost behaviour Patterns, j designed to change as volume of activity. changes, "a - XEVTERM Two uses of flexible (a) At the planni ©. For example, suppose that 2 company expects to sell 1,000 units of utput during the next year. A master budget (the fixeg budget) would be prepared on the basis of (these expected volumes. However, if the company thinks that outpd® and sa eS might be astow a 8,000 units or as high a8 12,000 units, it ay prepare contingency flexi rdgets, at woes of, Say 8,000, %:000, 11,000 and 12,000 units, ana thEN BESesslthe posfible outcomes. J), Retrospect ly-At the end of each control Period, flexible Budgets can be used to compare sta) results achieved with what results should have been under the circumstagces. Flexible budgets 2! . an essential factor in budgetary control, a Management needs to know about hqw/é Provide @ measure of performance Yrs eTUst DES which actual performance can be Measured, Every business is dynamic, and actual Volumes of output canngt be expected to contr exactly to the Fixed Budget. Comparing-actuat Costs directly With The fixed budget cos! Meaningless, Scanned with CamScanner2 Preparing flexible budgets 5 /10 Knowledge brought forward from earlier studies irst step in the preparation of a flexible budget is the determinatiok of cost behaviour patterns, which means deciding whether costs are fixed, variable or semivariable. The preparation of flexible budgets ya - “8 Fixed costs will remain constant as activity levels change. . Forngn-fixed costs, divide each cost figure by the related activity level. If the cost is a linear _Abratle cost, the cost per unit will remain constant. If the cost is @ semi-variable cost, the unit levels increase. ana rate will reduce as activity | heir fixed and variable components using the high/low method or the + Bait pam sao costs into t _ scattergraph method. . ie +t cost allowance for each cpieifate tna ase produced/sold x variable cost per unit) Zost* + (number of units cost item as budget cost allowance = budgeted fixed i : _ st ** nil for fixed cost * nil for totally variable co BUDGET is the budgeted cost ascribed to the level of EXIBLE ALLOWANCE/FLE el perod. It comprises Variable costs in cect proportion to “The BUDGET COST tion of the annual budget activity achieved in 4 budget - : Bes volume achieved and fixed O° Scanned with CamScannerFis] Ment is deleted 4 fumes cane A ROLLING BUDGET is defined as “A budget conti inuoush (month or qui quarter) when the earliest account fated. by adding 2 further accounting period i ing period has expired) Its use is particularly beneficial where ream ‘future costs and/or activities cannot be forecast ac ficial Terminology ;ccurat CIMA Official i For example, a budget may initially be prepare At the end of the first udget may initially be prepar fo December in year | ly red tthe cps vane Pass 1e ef i a ein eo teenage. ny Ye a iget is updated in the light of current conditions. portion atte ongina ee Pr 5.1 Advantages and disadvantages of rolling budgets (a) Advantages ® Accure ” by Hoeogeren and thus should be more realistic and (i) Budgets are reassessed. regularly accurate uyrcertamit® rca @ spam le sented ii is reduced. Rolling § igets focus ‘detailed planning and con! 1 on short-term Uncertain' “reduce prospects where the woes uncer ye is much smaller, is xo) ‘on a eee nd feb which Pan to be far more (iii) Planning and control realistic than a fixed annual budget prepared months ag. (iv) The budget is continuous and will always extend a number of months ahead. This is not the annual budgets are used. case when fixed ie * Wea pe aman (G > iget that takes account of regent perfaimance an\ market conditions is likely 8 realistic bud: 1o have a better ‘motivational influence on ne m avKet C ‘md iim v SS ve cat Rolling b 0 kame produced durin Consurm ing iy The volume of WO managers oO yeni ny ach revis ay require revision of standard or stock valuations. which could pu aed additional pressul ia accounts ‘department each time a rolling budget is prepared. udgets are time consuming and expensive as a number of budgets must be ig the accounting period. rk required with each reassessment of the budget can be off-putting for Scanned with CamScannerfi Budgeting as a control system TERM EY TERM 7.1 Budget control systems — key features A BUDGET CENTRE is defined in CIMA Official Terminology as ‘A section of an entity for which control ma be exercised through budgets prepared.' Budgetary control is based around a system of budget centres. Each budget centre will have its own budget and a manager will be responsible for managing the budget centre and ensuring that the budget is met. The selection of budget centres in an organisation is therefore a key first step in setting up a control system. What should the budget centres be? What income, expenditure and/or capital employment plans should each budget centre prepare? And how will measures of performance for each budget centre be made? A well-organised system of control should have the following features. Budgetary control and budget centres are therefore within an organisation, Part of the overall system of responsibility accounting Ra . : me SroASST, ACCOUNTING is a system of accounting that segregates revenue and costs into areas of responsibility in order to monitor and assess the performance of each part of an organisation. Scanned with CamScanner8 Key TERM, 7.4 Budgetary co If the bud vole cartel repo iget holders (m, oes er anagers gular budgetary control ae Dade cee) ar so 'o attempt to meet necessary control action, that they cai 7 N Monitor the budget cer x bude they must receiv . ceive re's operations and take any A form of exception variances, Feporting can be used for top management, reports just detailing signifi it rts just detailing significant nt ‘costs into areas of of an organisation. Feedback and feedforward control mechanisms ting back control information to information produced from sment and other 8.1 Feedback The term ‘FEEDBACK iS used to describe both the process of repor ment and the control information itself. In 2 business organisation, itis fn the purpose of helping manage within the organisation {management control reports) wit trol decisions: ly small variations the feedback of relativel employees with con .d as feedback, is i feedback, normally expresses 7 : Oren | and pian in order that corrective action can bring performance 19 tine with planned change. This type of feedback is associated ¢ existing plans will no with budgetary com costing feedback, 250 known as higher level feed ‘nd the control systems themselves are budgets: back, ensures that plans, es in (b) Double 100! revised to meet chanes Scanned with CamScanner10.3 Negotiated style of budgeting AN Be eee BUDGET is a ‘Budget in which budget allowances are set largely on the basis of negotiati get holders and those to whom they report.” CIMA Official Taint At the two - different eae budgets can be dictated from above or simply emerge from below but, in practice, approach, pea often agree budgets by a process of negotiation. In the imposed budget consider to be unresson eee will try to negotiate with senior managers the budget targets which they presented to them under a le or unrealistic. Likewise senior management usually review and revise budget managers. Final budgets eee approach through a process of negotiation with lower level like and what junior on therefore most likely to lie between what top management would really lanagers believe is feasible. The budgeting process is hence a bargaining process and it is this bargaining whi gaining which is of vital i i : 10.4 Budget slack Buper i 4 . a ea aac is ie ‘Intentional overestimation of expenses and/or underestimation of revenues during oo CIMA Official Terminology In the process of preparing budgets, managers might deliberately overestimate costs and underestimate sales, so that they will not be blamed in the future for overspending and poor results. In controlling actual operations, managers must then ensure that their spending rises to meet their budget, otherwise they will be 'blamed' for careless budgeting. Budget bias can work in the other direction too. It has been noted that, after a run of mediocre results, some managers deliberately overstate revenues and understate cost estimates, no doubt feeling the need to make an immediate favourable impé delay problems, however, 2s the managers may targets. Yet again this is an exam Jet by promising better performance in the future. They may merely ‘well be censiired when they fll to hit these optimistic ple of control systems distorting the processes they are meant fo serve- Scanned with CamScannermS 12.1 Is moti Can performance me. towar at ivate managers achieving the organisation's =a ‘elated budgetary control system ever moti Vation from budgets ever possible? (@) Accounting measur nat a pe eS of 7 ssment of wha’ has achieved for the ae can't provide a comprehensive asses: (b) tis unfair as it ig Z : : ents Performance, !MPossible to segregate controliable and uncontrollable compo! (c) Accounting reports tend te : : 0 concentr: x i the exclusion of the eetemens trate on short-term achievements, to the (d) Many accounting reports ry to serve Needs actually Satisfy non /@ several different purposes, and in trying to satisfy several e properly, 12.2 Support from senior management The management accountant does not have the authority to do much on his or her own to improve hosti OF apathetic attitudes to control information, There has to be suppor, either from senior management or from budget centre managers. (a) How senior management can offer support (i) Making sure that a system of responsibility accounting is adopted. (ii) Allowing managers to have a say in formulating their budgets, (iii) Offering incentives to managers who mest budget targets. (iv) _ Not regarding budgetary control information as @ way of apportioning blame. iV) b) Budget centre managers t i bilities. In-house training courses could be get should accept their responsibilti ° m a 2 eoledtive, cooperative and positive attitude among managers. held to encout : 12.3 Support from the management accountant in the following ways. ‘ent accountant can offer support in he, The managem tionship with: operational managers, going out to meet them and jorking relatio (a) Develop a w' orts. 4 een discussing the control rep ntrol reports. F eaniny (b) Explain the m ice are its and Co! 1g of budget e 5 toa minimum. (c) Keep accounting jane c) Scanned with CamScanner' 4 You are Yoon appointed Management Accountant of Gama Ltd., a company provides The operating statement for its IT Required: consultancy services to NGOs and various small industries division which operates as profit centre for the year ended June 30, 2014 is as under: Rupees. Budget Actual Variance Chargeable consultancy hours 2,400 2,500 100 Central administration costs - fixed 30,000 31,500 11500 (A) Consultants’ salaries ~ fixed 160,000 168,000 8,000 (A) Casual wages — variable 1,920 1,200 720 (F) Motor and travel costs ~ fixed 8,800 8,800 io Telephone - fixed 1,200 1,600 400 (A) Telephone — variable 4,000 4,300 300 (A) Printing, postage & stationery - variable ~ 5,280 5,180 100 (F) Depreciation of equipment ~ fixed __ 6,400 7,160 760 (A) Total costs 217,600 227,740 10,140 (A) Fees charged 360,000 400,000 __ 40,000 (F) 142,400 172,260 29,860 (F) Profit ‘The IT division's manager Mr.Kamal Alvi, having the IT background, does not know how flexible budget differs from the static budget. In, the beginning of July 2013, he was assigned e aclual profit has exceeded the budget the budget and he is extremely happy that th 29,860. He is keen to know how this has been achieved expectations by,Rs You have determined that central administration costs are not directly attributable to the profit {is an attributable cost. However, depreciation is not a centre but depreciation of equipment céntrollable cost since the profit centre manager has no control over investment Hecisions. ent approach to budgeting adopted in Gama Lid., and discuss the ig consultants in the preparation of future (a) Explain the-presi advantages and disadvantages of involvin budgets. Scanned with CamScanner Mai 07Revised Operating Statement S for the year ended June 2014 Rupees. <€ Original Flexed Budget__ Budget _ as Chargeable consultancy hours 2.4007 2,500 2,500” - Xt Fees charged _______- 360,000 375,000" 400,000 —-25,000 ( Variable costs ~ Actual Variance Casual wages ~ "4,920 2,000 1,200 _800_(F) Telephone ~ : 4,000 4,166 4,300 134 (A) Printing, postage and stationary 5,280 5,500 5,180 320 (F) Total variable cost-—______ "44,200 11,666 * 10,680 986 (F) Contribution ail 348,800 363,334 389,320 25,986 (F) > Controllable (ized cos's Consultant's salaries 160,000 160,000 168,000 8,000 (A) Motor and travel costs 8,800 8,800 8,80Q - Telephone 4,200 1,200 1,600 400 (A)_ Total fixed cost 170,000 170,000 178,400 8,400 (A) Controllable profit 178,800 193,334 210,920 17,586 (F) Attribut: x fi st 6,400 & 6,400 7,160 760 (A) ‘Attributable profit 172,400 186,934 203,760 16,826 (F) Uncontrollable fixed cost________— 30,000 "30,000 31,500 1,500 (A) Division net profit 142,400 156,934 172,260 15,326 (F -OR 2 * 2 * 2 9 ee Scanned with CamScanner; th Fan CrPoration, a manufacturing company has the following budgeted costs for one Mere | ch arexbased on a normal capacity level of 40,000 hours. A departmental overhear Aapotation fate of Rs. 66 per hour has been calculated on the basis of budgeted ove : c Overheads are given along with budgeted overheads as under: Budgeted _______ actual Overheads ixed {-( Variable per (ps. 000’) _ (Rs. ‘000') Hour (Rs.) Management and supervision 450 = 450.00 Shift premium = 1.50 60.00 Employees benefits and pension costs 90 3.30 225.00 , Inspection 300 3.75 420.00 Consumable supplies 90 «2.70 190.50 Power for machinery - 3.00 117.00 Lighting 60 = 63.00 Rent, rates and taxes 135 - 135.00 Repairs and maintenance 120 2.25 226.50 Materials handling 150 4.50 321.00 Depreciation of machinery 225 - 225.00 Auxiliary services ___180 - Total 1,800 2 ( Per hour rate 45 24.00 During the month of January 2013, the company actually worked 36,000 hours Required: (a) Prepare a statement showing the flexible bud iget for the m actual costs and the variance for each overheat nth Of Ji eed January 2013, the (p) Calculate the following: . (i) The rate of overhead absorbed. # (ii) The total amount under! over-spent Scanned with CamScanneruestion No: 5 man a Zarg Ci ji rq Corporation Flexible budget (36,000 units) for the month of January 2013 Fixed Variable Total =Total actual Variance (Rs:000') per Hour an fea ma (Rs000') (Rs.'000) Management and ee - eae 450.00 - 450.00 450.00 ~ Shift premium - 4.50 54.00 54.00 60.00 6.00% 1 Employees benefits and pension cost 90.00 3.30 118.80 208.80 225.00 16.20 : Inspection 300.00 3.75 435.00 435.00 420.00 (15.00) i Consumable supplies 90.00 2.70 97.20 187.20 190.50 3.30 | Power for machinery - 3.00 108.00 «108.00 117.00 9.00 Lighting and heating 60.00 - - 60.00 63.00 3.00 Rent, Rate and Taxes 13500 — - 135.00 135.00 - Repairs andmaintenance 120.00 2.25 at.00 201.00 226.50 25.50 Materials handling tg000 460 162.00 © 312.00 321.00 9.00 Depreciation of machinery 225.00 225.00 225.00 Production administration 160.00, ____ _ 180,00 __ 172.50 __(7.50) 4,800.00 756.00 2,556.00 2,605.50 49.50 OR 1 + f 9 = (b) (Overhead Absorption Rate: Overhead absorbed (2,556,000 + 36,000) 71.00 (ii) Total Amount Urider! Over-Spent: Total amount over-spent —_(2,605,500~ 2,556,000) 49,500 Scanned with CamScannerfollows. ey Production and sales of the Darcy (units) Sales revenue Direct materials rect labour / Production overhead { Administration overhead * Profit ny manufactures a single produ: “Boaget > (7309 $ 75,000 22,500 900 Scanned with CamScanner the Darcy, Budgeted results and actual results for Nay aTppose hat we Hove THE following estimates of the BahaVIOUT OT PENRVS GOS \ (a) Direct materials and direct labour are variable costs, o gene is 8 semivariable cost, the budgeted cost for an activity level of 10, eae ~ ” Affe IC is 2 fixed cost Seling prices are constant at all levels of sales —_ — Scanned with CamScannerA ctyed a | RY Fa, | i | aa (Narren | | sat Real | San) 4 Boge | | §leo0 iT 10 oeet moda 25a | | | | 24 bo 1 3Bs50 | || pine gd Anbet 1 Soap | | ithe | sso || | py ugha evshead’ | al | pees | | sot | | vad nispodion ep | a | | Pred se | Uy ek vasian aL A Yo - cowes nt it Scanned with CamScanner“Variable Fi — Chan jn ovabead aa Bp ge — —~per-urict —= Change 1p Actin ty wnit— OO 8a — +s. 2 TW th Then 1 Pricheling cvghesd Cate _ Ix) Pf fspibte Fixeol Egtatsns Scanned with CamScanner “de Teene buogeted to sell 200.units and produced the following budget. 5 ae OD Set—~—S Variable costs 5 a a Material —— = ee Contribution Actual Sooner oe 0 which were sold for $69,000. Actual expensiture on $27,006-an 4,000. Fixed costs totalled $10,000, Required Penare a flexible budget that wil be useful for management control purpos Scanned with CamScanner158 «230 Scanned with CamScanner