Operating Budget Final Paper
Padube09
ACC 206
Jacob Gordon
March 25, 2012
ACC206 Final Paper
An operating budget helps to organize and manage the costs and income to run your business. It helps a company to understand day to day costs and income for the company. “A detailed projection of all estimated income and expenses based on forecasted sales revenue during a given period usually one year.” (Operating budget) Overall it is a great way to ensure that the company can see if it is set up to make and exceed its breakeven point for the year. It gives a company a chance to review any changes that need to be made in order to be profitable for the year. Elements of an operating budget include the sales budget, production budget,
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If one toy takes a four foot piece of board to make, then with a twelve foot board four toys should be made. All that need to be figured out is how much that board is going to cost. Once these types of costs have been identified, then they can be put into the direct materials budget and accounted for.
The direct labor budget is also dependant on the production budget. As it has identified the number of units needed to be created we can figure out the number of hours it take to create each unit of production and then have a budget for labor. “To compute direct labor requirements, expected production volume for each period is multiplied by the number of direct labor hours required to produce a single unit.( WAO, 2012)” This gives the company manager the best idea as to how much labor it will take to produce products. It can also help in determining if hiring or firing of personnel needs to take place at a given time or overall. One thing a manager may want to use this for is to figure out if it is cheaper to pay employees more money to work longer hours or to hire new people. Without the knowledge of the sales budget and the production budget, this budget does not give out very reliable information.
The manufacturing overhead budget takes care of all other costs associated with production of units. Direct materials and labor have been accounted
The main reason behind it is that the variance analysis of materials, labor, and overhead indicates the difference between original budget and actual sales/amount. It explains that the management should make changes in the budgets in order to diminish the chances of failure (Epstein & Jermakowicz, 2010). Moreover, the company should make changes in its all budgets like production budget, sales budget, manufacturing budget, selling budget and general & administrative. These changes would be helpful to reduce the difference between the actual and projected sales of the firm.
The current cost system allocates overhead costs once a year, as a function of direct labor dollars. This allocation strategy results in:
The budget process is a powerful planning tool for government to make important resource decisions. According the Carney and Schoenfeld‘s article on How to read a Budget, an operating budget is a reflection of government’s financial plans. When a budget is
Planning is a function that is employed by every organization in projecting the future outcome of the firm. Successful firms achieve their goals through the use of different types of budgets. These budgets include, production budget, sales budget, labor budget and expenses budget. These budgets also show the targets that should be achieved by the firm within the budgeted time plan.
There are different types of budgeting that businesses typically use and those include Operating budgets, Capital Budgets and there are many subtypes that exist because a budget can also be created for special events, the recruitment and retention of new staff, and to manage the advertising expenses and return on investments for a business (Demand Media, 1999-2012). According to Demand Media (1999-2012), "An operating budget outlines the total operating expenses and income for the organization, typically for the period of a fiscal year. Capital budgets evaluate the investments and assets of the business, and a cash budget shows the predicted cash flow in and out of the business over a period of time” (para.2 ). According to the Cost-Benefit Analysis (2012), “Capital budgeting has at its core the tool of cost-benefit analysis; it merely extends the basic form into a multi-period analysis, with consideration of the time value of money. In this context, a new product, venture, or investment is evaluated on a start-to-finish basis, with care taken to capture all the impacts on the company, both cost and benefits. When these inputs and outputs are quantified by year, they can then be discounted to present value to determine the net present value of the opportunity at the time of the decision” ("Cost-Benefit Analysis," 2012).
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Overhead costs include rent, office staff, depreciation, and other. Once the flexible budget was complete, variances between the actual and flexible budget could be calculated (Exhibit B). The variance for frame assembly was favorable with actual costs being $82,663 less than in the flexible budget. The variances for wheel and final assembly however were both unfavorable. Wheel assembly had an unfavorable variance of $50,650, while final assembly variance was the highest at an unfavorable variance of $231,200. Taking into account these three aspects of direct cost, direct cost has an unfavorable variance $199,187. Although most overhead costs are fixed, 2/3 of other costs are variable and increase with the increased production. As shown in Exhibit B, overhead variance is unfavorable at $60,000. The direct cost variance and overhead variable together lead to a total unfavorable variance of $259,187.
The operating budget requires prepreration of data from sales, production, manufacturing, selling expense, and general and administrative expense budgets. The budget varaiance is the difference between the budgeted amount of expense or revenue, and the actual amount. The budget variance should be used when the actual revenue is higher than the budget or when the actual expense is less than the budget.
Budget formulation and use are tools that guide many decision making strategies in business. The measures that are least effective could create an avalanche of catastrophic events that can negatively impact the decision making strategies. It is in the best interest of the pertinent parties to draft an operating budget based on a collective set of information relating to organizational vision and mission. Ineffective measures can be catastrophic based on the foundation for measures used in creating the budget. Among the many issues organizations face that relates to creating an effective operating budget results from poor
Budgeting is crucial in the well-being of a company especially the financial health status of a company. In fact, no professionally managed firm would fail to budget, since the budget establishes what is authorized, how to plan for purchasing contracts and hiring, and indicates how much financing is needed to support planned activity. It is routine for a company to budget for its expenses. Expense budgets act as a guideline of how much revenue a company would require keeping the activities running. It is used to set the company’s targets for a certain period.
For instance, the concept of cost estimation which assists in estimating future expenditure as the expenditure depends on the cost of the respective activities can be applied in the setting of a budget which is simply an estimate and schedule of all costs required to be assigned to an activity. One can make an estimation of the resources required for an activity by applying the cost estimation techniques. Since there are limiting factors to each activity such as scarcity of resources for activities, the concept of constraints can be applied together with the concept of cost volume profit analysis to ensure that maximum benefits are driven from the scarce resources and the number of activities that are available. This facilitates the allocation of resources that most equitable and profitable. The theory of constraints is also applicable in the process of setting up budgets. In setting up budget one considers the amount of resources that are available and cannot therefore set a budget plan that exceeds the amount of resources that are available. This implies that the budget is constrained by the amount of
Theproduction budgetis prepared after thesales budget. Theproduction budgetlists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. Production needs can be determined as follows.
period (based on operating schedules and budgets) in terms of materials used, labor cost, and overhead cost, and then determining how much of this production, if any, was used to build up
The traditional budgeting model is built on an erroneous understanding of the overhead apportionments. Mostly, the companies use the labour hours, and the machines hours to allocate the overheads into different cost units. In reality, a single cost driver like the labour hours and the machine hours does not affect the incurrence of the overheads. The rate of consumption of the materials or the labour hours differs among the various product lines and the departments. Some products lines may consume a little amount of a given type of an overhead compared to another. When the absorptions rate used is not the real costs driver of the overhead used in a given product line, the costs will be either over or underestimated (Richards, 2011, p.78). The use of overall absorption rate produces information that is unreliable for use by the managers. They have to come up with strategies to control costs and compete effectively in the market.
Budget and budgetary control practices are undeniably indispensable as organizations routinely go about their business activities and operations. These organizations are constantly on the alert on how actual levels of performance agree with planned or budgeted performance. A budget expresses a plan in monetary terms. It is prepared and approved prior to a particular budgeted period and explicitly may show the income, expenditure and the capital to be employed by organizations in achieving their goals and objectives.