Question

Budgets and Standard Costing: Evaluate the different types of budgets and discuss how operating and financial budgets are prepared for a manufacturing company. Discuss the use of budgets and standard costs to control business activities. Explain how standard costs are used to determine variances.

Answer 1

In accounting, budget refers to the financial plan for business activities in future. It is formal statement that preparing detailed projections of estimation for income as well as expenses based on future objective and plans. A few of budgets are discussed as below:

A flexible budget refers to a budget that allows adjusting based on a change in the assumptions used to create the budget during management's process of planning.

A fixed budget is a budget that remains the same even if there are significant changes from the assumptions made during planning.

A sales budget is refers to the direct outcome of sales forecast. It is based on the consideration of future prediction of sales, competition in the market, past sales trends, demand and supply situation, seasonal changes that affect sales and so on.

Strategic budgeting refers to the process of creating a long-term budget that spans a period of more than one year.

The production budget calculates the number of units the firm requires to produce in order to meet its sales budget

Direct labor budget refers to the number of direct labor hours and total direct labor cost needed for process of production

Overhead budget refers to variable overhead costs and fixed overhead costs for process of production

Selling and Administrative Budget refers to expenses indirectly related to the sale of specific goods, thus are considered for in the selling and administrative budget.

Budgets are quantitative statement, for a set period of time frame, which may include expenses, planned revenues, assets, liabilities, and cash flows. Budgeting system is the system that involves the process of designing, implementing, and operating budgets. Budgets and the budgeting process acts as a mainstay in modern management accounting to solve the organization problem.

Benefits of Budgeting:

--Budgeting encourages a management to articulate its vision, strategy, and goals. It provides a valuable means on control of income and expenditure of an entity as it is a plan for spending

--Budgets acts as a management-control function. It provides a tool through which managerial goals and policies are periodically tested, evaluated, and established as guidelines for the entire business

--With usage of budget targets as benchmarks, management can closely monitor progress toward (or deviations from) the budget targets and timetable

--Budgeting helps in controlling the expenditures for specific periods by making a comparison what was spent during that period to the master budget

--Budgeted financial statements and it's supporting schedules give clear destination points to the managers i.e. the financial flight plan for a business.

-- It assists in directing capital as well as other resources into the most profitable channels

In accounting, standard costs are used by certain manufacturers for the identification of the differences or variances between standard cost and an actual cost, and when a material negative variance is incurred the management takes an appropriate action to correct the problems. Thus standard costs are used to as a tool that assist the management in controlling costs.