Comparative Budget Making based on Given Financial Accounting Information
In this section, part one, two and three are combined so as to prepare static and flexible budgets based on number of units sold by the month of August while determining if the actual budget is favorable for the company or not. This is done by performing a variance analysis that aims to highlight financial differences between static (fixed or expected) and flexible (actually realized) budget .
Changes in Sales Volume, its Variance and the need for Flexible Budget
When any form of variance occurs in sales volume, it means that there exist a difference between planned and actually realized number of units sold, even if the per unit selling price remains the same. There are numerous reasons for which sales volume changes over time. The first of these factors is changes in competitive environment or rivalry in the related industry. In case of the budget assumed in this report, the sales volume (in units) has increased because the demand for company’s products has increased in August due to more customer awareness and exploitation of new marketplaces though all other operating expenses remain the same.
The second reason for changes in unit sales volume pertains to changes in per unit price, which is certainly not the case. Here, the selling price per unit or product remains the same at $3.00. The company has kept marketing and selling budget the same which means that no additional efforts are made to market the product through advertising and sales promotion.
In case stated above, the consumer confidence may have resulted in an increase demand for company’s products. It is possible that increase in demand is also driven by improvement in quality and service delivery of company’s product in August.
The Reason for Changes or Differences in Static or Flexible Budget
Static budget is the one that never changes while flexible contains budgeted information that changes due to difference or realization of actual activity in terms of total output. In other words, both of the budget formats differ due to changes in sales volume and selling price per unit. The major reason for which static and flexible budget varies is that the former is based on an assumption whereas the latter is based on realistic and practical measures of financial performance.
Static budget is prepared at start of the year when none of the internal and external forces are examined to track financial performance. In contrast, flexible budget varies from the fixed or static budget because changes in the internal and external environment influence the actual financial performance of an organization. This form of budget making technique adopts changes in business environment and internal resources.
The Need for Flexible Budgeting
Before preparing flexible budget, companies prepare, static budget for creation of projected financial performance based on historical trends. Later, companies prepare flexible budget for evaluation of financial performance during the financial accounting or budgeted period. When any favorable or unfavorable variance or difference in static and flexed budget is highlighted, managers can take necessary action to adjust resources. This is the core benefit offered by the flexible budget to companies. In other words, flexible budget helps managers decide and determine if the projected financial information is actually realized or not. Companies need to finalize flexible budget in order to compare financial results over time and adjust resources wherever/whenever necessary.
References
V., R. (2010). Cost Accounting. Pearson Education India.
