ASSIGNMENT

Budget Analysis

Budget Analysis

Requirement 1

Budgetary control system is one of the tools for planning and control. The success of the company depends on how well the planning is done. In this process the budgeted figures are compared with the actual figure. It seems that the fixed budgeted figures are compared with the actual budget without flexing it. Therefore, there is a problem with the company's employee. It seems that the focus is on the dollar amount not on the volume of the goods is being produced. For example, the company has set target of 2000 units with fixed cost of $ 20,000 and variable cost of $ 60,000. It means that the total budgeted cost is $80000. It is compared with the actual figures without looking at the volume. Now suppose that the actual cost incurred is $ 90,000 and the volume is 2,500 units. If $ 90,000 is compared with $80000, it looks that the spending is more by $ 10,000, which is wrong. Because the actual cost should have been spent for 2500 units is $20000 fixed and $ 75,000 for variable, therefore the flexible budget for actual volume should be $ 95,000. Now compare it with $90, 000, which shows there is saving of $ 5,000 not overspending of $ 10,000. It means that overspending always is not a bad thing.

Requirement 2

The company should compare the actual figures with the flexible budget not the static budget. Company should also take into consideration the work to be done in future. The company should also revise its estimate, if the estimate is for less work to be done the budget will be on the lower side, but if the work is according to the capacity of the company then the budget will be reasonable, which will not create problem for departmental head to work more when their budgets have been attained, if they would have been made on unrealistic estimate.

The company may also use standard cost technique for control purpose, they set standard for each activity and then multiply that standard rate with actual activity carried on to compare with actual cost in dollars incurred. For example, the standard cost to produce one unit is $ 20 per unit and the company produces 5000 units, the standard cost allowed for actual production is $100,000, then it should be compared with the actual cost incurred, it the cost incurred is $90,000, it means the company has saved $ 10,000 and if it is $105000, it shows overspending of $5,000.

Requirement 3

Activity Based Costing (ABC) System serves as an alternate to the company's usual costing system. It provides manager with a helpful tool that aids in making strategic decisions and controls the fixed costs. ABC costing system is especially helpful for decision making that directly affects the capacity of production of a company. In traditional costing systems, the basic aim is to value the inventories and cost of goods sold in accordance with the GAAP (Generally Accepted Accounting Principles) whereas in ABC ...