1st step in preparing flexed budget

Determine the cost behavior patterns, i.e., fixed, variable, or semi-variable

Fixed costs will remain constant. These are the easiest numbers to plot

For variable costs, divide each cost by the activity level to determine the cost per unit

For semi-variable costs, split the costs into their fixed and variable components using the high-low method or linear regression

Compute for the budget cost allowance for each cost item

5th step in preparing flexed budget

Compute for the budget cost allowance for each cost item

Determine the cost behavior patterns, i.e., fixed, variable, or semi-variable

Fixed costs will remain constant. These are the easiest numbers to plot

For variable costs, divide each cost by the activity level to determine the cost per unit

For semi-variable costs, split the costs into their fixed and variable components using the high-low method or linear regression

4th step in preparing flexed budget

For semi-variable costs, split the costs into their fixed and variable components using the high-low method or linear regression

Determine the cost behavior patterns, i.e., fixed, variable, or semi-variable

Fixed costs will remain constant. These are the easiest numbers to plot

For variable costs, divide each cost by the activity level to determine the cost per unit

Compute for the budget cost allowance for each cost item

2nd step in preparing flexed budget

Fixed costs will remain constant. These are the easiest numbers to plot

Determine the cost behavior patterns, i.e., fixed, variable, or semi-variable

For variable costs, divide each cost by the activity level to determine the cost per unit

For semi-variable costs, split the costs into their fixed and variable components using the high-low method or linear regression

Compute for the budget cost allowance for each cost item

3rd step in preparing flexed budget

For variable costs, divide each cost by the activity level to determine the cost per unit

Determine the cost behavior patterns, i.e., fixed, variable, or semi-variable

Fixed costs will remain constant. These are the easiest numbers to plot

For semi-variable costs, split the costs into their fixed and variable components using the high-low method or linear regression

Compute for the budget cost allowance for each cost item

Variances may arise from three (3) main groups:

variable cost variance, fixed overhead variance, sales variance

It is the first step in setting up budgeting as a control system.

Identifying and selecting budget center

A control system should have the following features:

Hierarchy of budget centers, Clearly identified responsibilities for achieving budget targets, Responsibilities for revenues, costs and use of capital

Managers should be responsible for achieving budget targets for each budget center.

Clearly identified responsibilities for achieving budget targets

Budget centers should identify who is responsible for actual revenues, actual costs, and actual use of capital, and that person should have an appropriate level of authority within the management.

Responsibilities for revenues, costs and use of capital

Types of responsibility centers: CRIP

Cost center, Revenue center, Investment center, Profit center

It is a form of feedforward control.

preparing a budget, forecasting

The drawback of implementing a feedforward control system is that it is both

time consuming, labor intensive

Information obtained from the control system will only benefit the company if managers and employees take it positively and use it to correct what needs to be done. Otherwise, the recipients may react negatively, and their attitude may be biased to the corrective actions that must be taken to remedy the situation. Having said that, the following behavioral problems may arise:

Managers may not be involved in the budgeting process. It is hard for people to be motivated to achieve their targets set by somebody else

The organization's goals as a whole may not be congruent to the personal goals of the individual manager. For example, a sales manager may be interested in selling more, even to the extent of exposing the company to higher credit risks;

Control is exercised at different levels by different managers. For example, a manager may receive weekly control reports and make decisions to address the variances, while a higher manager may receive monthly reports and take a different action. Different managers may get in each other’s way and resent the interference from others.

Negative attitudes in preparing budgets:

Managers may feel that they are too busy to spend time budgeting

Managers may build slack into their budgets to protect themselves in the future so that variances will always be favorable

Managers may feel that a budget plan is too restricting and that they must be given more flexibility in the decisions they make

Managers may put only just enough effort to achieve budget targets without trying to beat the targets

Negative attitudes in preparing budgets:

Managers may set their budgets for their own budget center without coordinating with other budget centers

Managers may become conservative by planning their budgets based on past results instead of looking at the opportunities and planning for new ideas

Managers may feel that they need to spend their budgeted allowance full, even if they do not need to, to ensure that their allocation for next year will not be diminished or so that they will not be accused of having asked for too much spending allowance

Minimal communication between managers

Negative attitudes in implementing budgets:

Short term planning in a budget can provide a myopic view and draw attention away from the long-term consequences of decisions

Managers may feel that they need to spend their budgeted allowance full, even if they do not need to, to ensure that their allocation for next year will not be diminished or so that they will not be accused of having asked for too much spending allowance

Minimal communication between managers

Managers may set their budgets for their own budget center without coordinating with other budget centers

Negative attitudes in implementing budgets:

Managers may put only just enough effort to achieve budget targets without trying to beat the targets

A formal budget may encourage rigidity and discourage flexibility

Managers may resent the control reports, seeing it as a system of finding fault at their work. This is prevalent when budgets are imposed on managers without allowing them to participate in the budgeting process

Managers feel that they have more important work to do than review accounting control reports

Negative attitudes towards the control information:

Managers may resent the control reports, seeing it as a system of finding fault at their work. This is prevalent when budgets are imposed on managers without allowing them to participate in the budgeting process

Managers feel that they have more important work to do than review accounting control reports

Managers may not understand the accounting control reports because they are not familiar with accounting terminology

A formal budget may encourage rigidity and discourage flexibility

Negative attitudes towards the control information:

Managers may have a different set of objectives or beliefs. For example, a production manager may feel that it is more important to maintain quality rather than cost. Hence, they may view an unfavorable labor variance as an unavoidable cost of maintaining quality

Managers may not trust the reliability of the accounting control reports if there are flaws in the system

Managers may receive delayed accounting control reports; hence they may disregard the information as outdated and no longer useful

Managers may feel they are responsible for variances that are outside their control

Managers may feel that they are too busy to spend time budgeting

BUDGETARY CONTROL

Authored by Trisha Quiñosa

Mathematics

1st - 5th Grade

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FILL IN THE BLANK QUESTION

1 min • 1 pt

It shows how the cash level will change over the following months.

FILL IN THE BLANK QUESTION

1 min • 1 pt

Cash budgets are based on the

FILL IN THE BLANK QUESTION

1 min • 1 pt

The goal of the cash budget is to provide management the information on

FILL IN THE BLANK QUESTION

1 min • 1 pt

Forecasting cash flow is an example of a

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The cash budget is usually composed of four (4) sections:

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1 min • 1 pt

The following are the steps in preparing a cash budget:

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It consolidates all subsidiary budgets and is normally part of the budgeted profit and loss account, balance sheet, and cash flow statement.

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BUDGETARY CONTROL

It shows how the cash level will change over the following months.

Cash budgets are based on the

The goal of the cash budget is to provide management the information on

Forecasting cash flow is an example of a

The cash budget is usually composed of four (4) sections:

The following are the steps in preparing a cash budget:

It consolidates all subsidiary budgets and is normally part of the budgeted profit and loss account, balance sheet, and cash flow statement.

It is prepared during a planning activity based on an estimated sales and production volume.

It is a budget set before the control period, and not subsequently changes in response to changes in activity or costs, or revenues. It may serve as a benchmark in performance evaluation.

It is also designed at the planning stage to vary with activity levels. It is used to show different results from possible activity levels.

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