Question

Opening Case

Lennox looked anxious and happy at the same time. He was happy because he was just a week away from going on a well-deserved vacation that he and his wife had been planning for some time. He was anxious however because it was the first time in a long time that he would be leaving his business for about a month and was concerned about how the operations would go without him present.

Lennox is the proprietor of Flower Fantasy that has been in operation for over five years. They propagate a variety of flowering plants, which are sold to garden shops and other such establishments. Approximately two years ago he became the sole owner when he bought out the share of his partner. Since then he has always been present to supervise the operations. He is ably assisted by his four workers who have assured him that everything would run smoothly in his absence. They have been with him for quite some time and between them, they are able to carry on the entire process.

One of the senior guys said to him, "Boss you have no need to worry. We have a budget for every month so we know how many plants we need to propagate while you gone".

"That is true but if I not watching you guys you use materials like it free and work in your own merry time," Lennox replied.

"Yes, but we all know how much materials and labour time it takes to produce a batch of plants, so you don't have to be here all the time. When you come back you could compare what material we actually use with what we was suppose to use and you could do the same thing for labour and overhead cost too. Where there are big differences we would have to answer," said another worker.

"You make a good point, but if there is a need to produce more than the budget to satisfy our customers need just do it and we would adjust the budget accordingly to reflect how much was actually produced," Lennox said with contentment.

As he went home that evening to continue packing, Lennox felt a bit more comfortable with going on his vacation. He now realized that even though he would not be present there were mechanisms in place to ensure that cost was being controlled.

1. What method does Lennox intend to use as a measure of cost control?

2. How does the budget serve to guide the workers?

3. What type of budget is Lennox referring to when he said he would "adjust the budget"?

Answer 1

For the purpose of cost control he used the standard costing techniques thus though he is gone he will compare the actual with the standard thus will come to know about the variances.

The budget will serve as guide to the emoloyees.it gives a sense of direction to them.they will know what is expected of them such as

How many units to be produced

In how many labour hours a unit needs to be produced etc

Adjust the budget implies flexible budget

Flexible budget is the budget at the actual capacity level. Because flexible budget is dynamic, it is commonly used by companies. Flexible budget is adjusted to the actual activity of the company. At first, the relevant activity range is determined for the coming period. Next, costs that are expected be incurred over the relevant range are analyzed. These costs are then separated based on their cost behavior: fixed, variable, or mixed. Finally, the flexible budget for variable costs at different points throughout the relevant range is prepared. In other words, flexible budget matches expenses to specific revenue levels or activity levels.

Thus when there is a increase we can adjust the same to required level