Question

In your own words, in detail explain the purpose of flexible budgets and the flexible budget performance report. Additionally, explain in detail what the purpose of computing the materials, labor and overhead cost variances.

Answer 1

A flexible budget refers to a budget that adjusts expenditure based on changes in actual revenue or other activities. The purpose of flexible budget is:

-- Provide managers slack in their budget

-- Reducing the fluctuations in production reports

--Comparison of actual and budgeted results at various level of activity

-- Making the annual budget process more effective

A flexible budget performance report refers to a report that makes a comparison of the actual results for a period with the budgeted results generated by a flexible budget. The purpose of flexible budget performance report is:

-- Helps management to know if there are any major differences among the estimated budgeted numbers and the actual ending numbers.

--Allows management to analyze the business areas that are meeting their budget targets and the areas or departments that require improvement

--It scale the initial budget to provide a meaningful comparison; thus informs whether the business is under or over-budget; and determine what caused business to fall or exceed below the expected gross profit.

Material Cost Variance provides details on how much more or less cost has been incurred in comparison to the standard cost; and thus a tab on the deviations from the standard can be set by business. Favorable variances result when standard cost exceeds actual costs, and vice versa. Labour cost variance occurs due to the difference between the standard cost for actual production and the actual cost in production. It provides information can be used for purposes of planning in the development of budgets for future periods, and provide feedback loop back to those employees who are responsible for the direct labor component of a company. Overhead cost variance refers to under or over absorption of overheads. The better companies are able to manage overhead costs, the more competitive they are in the competition.