Question

Write an analytical summary of your learning outcomes from Capital Budgeting Used to Make Decisions and Evaluate Performance Using Cost Variance Analysis

In addition to your analytical summary, address the following:

1.     As a manager, discuss how you would use or have used the concepts presented in Capital Budgeting and Cost Variance Analysis

2.     Why might managers find a flexible-budget analysis more informative than a static-budget analysis?

3.     How might a manager gain insight into the causes of flexible-budget variances for direct materials, labor, and overhead? Provide at least one numerical example to support your thoughts.

Please word limit 400 and No Plagiarism

This full Question please answer it.

Answer 1

Summury of learning outcomes from capital budgeting.....

Meaning of Capital Budgeting

Capital Budgeting is the process of making investment decision in fixed assets or capital expenditure. Capital Budgeting is also known as investment, decision making, planning of capital acquisition, planning and analysis of capital expenditure etc.

Capital Budgeting Analysis is a process of evaluating how we invest in capital assets; i.e.
assets that provide cash flow benefits for more than one year. We are trying to answer the
following question:
Will the future benefits of this project be large enough to justify the investment given the risk
involved?
It has been said that how we spend our money today determines what our value will be
tomorrow. Therefore, we will focus much of our attention on present values so that we can
understand how expenditures today influence values in the future. A very popular approach
to looking at present values of projects is discounted cash flows or DCF. However, we will
learn that this approach is too narrow for properly evaluating a project. We will include three
stages within Capital Budgeting Analysis:
! Decision Analysis for Knowledge Building
! Option Pricing to Establish Position
! Discounted Cash Flow (DCF) for making the Investment Decision.

Decision-making is increasingly more complex today because of uncertainty. Additionally,
most capital projects will involve numerous variables and possible outcomes. For example,
estimating cash flows associated with a project involves working capital requirements, project
risk, tax considerations, expected rates of inflation, and disposal values. We have to
understand existing markets to forecast project revenues, assess competitive impacts of the
project, and determine the life cycle of the project. If our capital project involves production,
we have to understand operating costs, additional overheads, capacity utilization, and start-
up costs. Consequently, we can not manage capital projects by simply looking at the
numbers; i.e. discounted cash flows. We must look at the entire decision and assess all
relevant variables and outcomes within an analytical hierarchy.

Cost variance analysis is a control system that is designed to detect and correct variances from expected levels. It is comprised of the following steps: Calculate the difference between an incurred cost and an expected cost. Investigate the reasons for the difference. Report this information to management.The cost variance analysis is the most common performance evaluation tool when evaluating a cost center. A cost center is a subunit of an organization that has control over costs but not revenues and investments. Examples of cost centers are production department, maintenance department, finance and accounting, etc.

1-As a manager, discuss how you would use or have used the concept present in capital budgeting and cost variance analysis?

Requiring managers to determine what caused unfavorable variances forces them to identify potential problem areas or consider if the variance was a one-time occurrence. Requiring managers to explain favorable variances allows them to assess whether the favorable variance is sustainable. Knowing what caused the favorable variance allows management to plan for it in the future, depending on whether it was a one-time variance or it will be ongoing.

Another possibility is that management may have built the favorable variance into the standards. Management may overestimate the material price, labor rate, material quantity, or labor hours per unit, for example. This method of overestimation, sometimes called budget slack, is built into the standards so management can still look good even if costs are higher than planned. In either case, managers potentially can help other managers and the company overall by noticing particular problem areas or by sharing knowledge that can improve variances.

2- Why might manager find a flexible budget analysis more informative than a static budget analysis?

A flexible budget is one that is allowed to adjust based on a change in the assumptions used to create the budget during management's planning process. A static budget, on the other hand, remains the same even if there are significant changes from the assumptions made during planning.

The greatest advantage that a flexible budget has over a static budget is its adaptability. In the real world, change is real and it is constant. A flexible budget can handle that reality and better position a company for the challenges of the marketplace.the flexible budget is able to account for both fixed and variable expenses in a better, more responsive way than the simpler static budget could.

3- How might a manager gain insight into the causes of flexible budget variances for direct material, labour and overheads?

A flexible budget shows the budget figures for each line item from the static budget, the actual figures as shown on business statements, and the variances between the figures. Line items vary by business type but commonly include individual overhead costs, such as materials, and labor costs. A favorable variance works to the business's advantage by increasing overall income, while an unfavorable variance represents unexpected costs or cost increases that negatively affected profit levels. Unfavorable variances represent areas the business must work on to improve profits and reduce overhead.