Question

Question 1: Please identify and discuss the elements of a budget, and the sequencing these elements follow. Who should be constructing the budget, and why?

Question 2: Please discuss how variances between standard and actual costs/hours/quantities occur, and identify what a FAVORABLE variance is versus an UNFAVORABLE variance. Give examples.

Question 3: Many large manufacturing and retail companies have several different departments. Why is it useful for management of these companies to:

1 - Collect accounting information from each department?

2 - Treat each department as a profit center?

Answer 1

These are the sequential elements of budgets.

Plan

Resources

Financial terms

Specified future period

Comprehensiveness

Coordination

1.plan-Budgetary control forces the management at all levels to plan,in time ,all the activities to be done during the futue period with proper coordination and communication

2.Resources- budget plan what are the resources are required for the project and how to get it.

3.Financial terms-Budget direct the financial terms as what will be the outflow and inflow of money

4.specified period-Budget should be prepared for a specific period for different department or project .such as product department or sales department for half yearly or quarterly or monthly.

5 comprehensiveness- It is equivalent to master budget. As it is integrated of all activities , division & department.

6.Cordination-Budgetary control forces executives to think and think as a group.It develops team spirit amongst the employees to work in a coordinated manner.

Who should construct the budget

The corporate level of management should construct the budget.But it includes all level of management to execute it

The corporate level of managers oversees the development of strategies for the whole organisation so it's he responsibility of top level of management

2. A variance is the difference between a budget ,planned or standard amount and the actual amount incurred or sold.

Favourable variances - It occures when costs are lower than expected in the budgets or revenue is higher than expected in terms of costs/hours/quantities.

Unfavourable variances - It arises because coats are higher than expected or revenue os lower than expected in terms of costs/house/quantities .

Example of favorable variances

When standard cost as expenses $300

And actual cost is $200

The cost variance is $100 favourable

When standard hour to do a job is 3 hours and actual hours taken 2 hours.

The hour variance is 1 hour favourable

Example of unfavourable variances

When we estimated a standard quantities of 100 tons of input and actually it is taken 150 tons

Then quantity variances is 50 tons unfavourable

If in that case if a standard quantities of 100 tons of output actual production 50 tons

Then quantity variances is 50 tons unfavourable

As it gives less proft as expected.

3.an accounting ayatsy that collects , summarises and reports accounting data relating to the responsibilities of individual managers.It helps to track and report costs ,expenses revenues and operational statistics by area of resposresponsi or organisation unit. Collecting of accounting information of each department help the top level management to ascertain the profit and to take furhfur decision.

Treat each department as a profit center

Each department is a responsibility center and each responsibility center has both revenues and expenses. A manager must be able to control both of these categories. controllable profits of a department can be shown when the expenses under a manager's control are deducted from revenues under that management control. After that a organisation's net profit can be calculated.so all departments are considered as profit center