Functional and Activity-Based Budgeting
What is the importance of Budgeting?
Similar to pricing decision, budgeting also takes an important role in the planning process of the business. It aims to provide a direction that will guide the firm in the achievement of it sales objective. Budgeting help the firms to project the expenses they might incurred in their business operation for a given period of time. Projecting these expenses will allow them to allocate their financial resources to avoid spending it to unnecessary things. It ensures that the firm always has the money to the things that they needed and keep them out of debt. It also helps the company to predict their sales for the next period which is very helpful in the achievement of the organizational objectives. By predicting their sales, company can monitor if they are still walking in the direction they aim to go.
When is the proper time to prepare the budget?
The proper time to prepare budget is always before the starting of the business operation. Before the business operates, it needs to identify the activities it needs to operate. Identifying the activities will allow them to allocate financial resources to operate these activities. For instance, the first thing that a firm needs to do to is to conduct a marketing research to identify what products they should sell, at what price, to whom, when and where and how they should sell it. After identifying the marketing mix, company can now proceed in designing their product and producing it. Hence, in preparing their business, they need to allocate a budget for marketing research, product design and production process. Doing so, will help the firm identify how much capital they need and what expenses they should consider.
How to prepare the sales budget?
Sales budget is the primary step in identifying the overall budget for the business operation. With an accurate projection of future sales, firms will be able to make efficient decisions that will help them survive in the competitive market. Sales budget helps the firms to maximize their profit by managing and allocating their expenses accurately. In preparing sales budget, the firms needs to identify first the period they wish to project the sales, it can be every month, quarterly, or yearly. After identifying the period, the firm will now set their estimates sales projection through multiplying their desired selling price to the number of units they tend to produce for the period. It is important to take note that in estimating the selling price, the cost of producing the products and services as well as the mark up must be taking into consideration. If the firm is already performing for more than on period, they can also rely from their previous sales in determining how they will set their sales budget for the next period. For instance, the company aims to increase their sales by 10% firm the next period. They can do this by increasing the units of product they wish to sell or the selling price.
How to prepare a production budget?
Production budget or manufacturing budget is a part of a firm's operating budget. Basically refers to the budget allocated to produce the products. After estimating the sales budget, the firm can now estimate their production budget based on their sales projection and sales budget. Production budget is made to determine how many quantities the company needs to order to meet the projected sales. Production budget has four components: the beginning inventory, sales forecast, ending inventory and the number of production unit required. Beginning inventory refers to the number left over from the previous budgetary period, from the previous period, it is the ending inventory. Hence, the beginning inventory is the number of unit leftover from the current period that will be a beginning inventory for the next period. Sales forecasts the projected sales return that the company will gain after selling their inventories. And the production required, is the number of products that firms need to produce. In computing the production budget, the ending inventory will be added to the forecasted unit sales, then, the beginning inventory will reduce from it.
How to prepare the cash budget?
According to Investopia, cash budget is the estimated cash flow of a business over a specific period of time, cash budget is important as it is used to assess whether company has sufficient cast to continue their business operations over the given period. If not, company should find additional source of funding. It also provides the company an insight in how they efficiently allocate their cash. Cash budget is compromised of two main areas; the source of cash and uses of cash, The sources of cash contains the beginning cash balance, the cash sales, account receivables, and loans, The uses of cash contains the payments from purchases, payments for accounts payable, and other expenses. Assumptions are taken into consideration in preparing the cash budget. Firms also relied on their present cash balance in determining their cash budget for the next accounting period.
Standard Costing
Standard costing helps the company in estimating their budget plan. As actual cost cannot be known in advance, standing costing is used to estimate the cost that the company may allocate in their production process. It is also known as predetermined cost or expected cost. At the end of the accounting period, a standard cost higher than the actual expenses is considered as favorable variance; meanwhile, it is an unfavorable cost if the actual cost is higher. There are two toes of standard under standard costing: the ideal standard which is the expectation that the operation of the company will be perfect and practical standard wherein problems were expected to arise such machine breakdown, employee abscesses or insufficient quality materials. In calculating standard cost, the total cost of direct labor, direct materials and manufacturing overhead is computed. There are advantage and disadvantage of using standard costing. One of the advantages of standard costing is that it allows the company to budget as it estimates the cost that the company may accurate in aerating accounting period. It also allows the company to plan their inventory as calculating inventory value is easy as multiplying the amount of inventory by the standard cost if each unit. Doing so, provides the company a benchmark which will be their allowance in case the actual cost of producing a unit is higher than the standard costing, Allowing benchmark will help the company to improve the efficiency of their production process. Lastly, it also allows the company to set the prices of their products with the consideration of yet estimated production cost. On the other hands, the disadvantage of standard costing; it only focuses of unfavorable variance that is why determining material variance is difficult. It failed to consider other variances such as trend which affects the actual cost of productions as trends is changing.
Material Variance Costing Analysis
Direct material refers to the materials and supplies used for manufacturing product. Material cost variance is the difference between the standard cost of direct materials and the actual cost of direct materials used in the production process. Material cost standard provides an idea to the company of how much cost they have been incurred compared with their standard cost. Using variance analysis, the company can compare the actual materials used in the production process than what it should be. There are four components that made up the material variances: actual quantity, actual price, standard quantity, and standard price. The difference between the standard price and the actual price is called material price variance, while, the difference between the standard quantity and actual quantity is called material usage. If the variance is favorable, it, means the company is efficient is using their materials and allocating ether budget. But if it is negative variance, it means that the company is inefficient. The result is adverse if it the actual price and quantity is less than the standard price and quantity.
Labor Variance Analysis
Direct labor refers to the cost accumulated as a payment in the labor or efforts rendered by employees to the production process. Labor variance or also known as direct labor variance is the difference of the actual cost associated with labor activity from the standard cost. There are four components in computing the labor variance: the actual hours, actual rate standard hours, and standard rate. Actual hours refer to the actual hours used in the production, while standard hours are the expected hours allocated for the production. Actual rate refers to the actual labor rate used in the production, while standard rate is the expected labor rate allocated for the production. The difference between the actual and expected hours used is called Labor efficiency variance. While, the difference between the actual and expected cost per hour used is called Labor rate variance. There will be an unfavorable variance if the actual hour or actual rate is more than the standard hour or standard rate. That is why, it is an advantage to always have a favorable variance as us can benefit the company such as getting cheaper labor may help them lessen their expenses and save allocate their budget.
Factory Overhead Variance Analysis
Factory overhead or also known as manufacturing overhead refers to expenses incurred during the production process but not included in the costs of direct labor and direct materials. The difference between the factory overhead allocated to inventory and the standard amount that had been budgeted is called Factory Overhead variance. There are four component under factory overhead variance, these are: actual factory overhead, actual hours, variable factory overhead rate, and standard hours. Factory Overhead variance may be divided into two: the variable spending variance and efficiency variance. Variable spending variance occurred when the actual factory overhead is different from variable overhead. There will be an unfavorable variance if the actual overhead is more than the standard variable overhead, this may happen when the company has an excessive usage of overhead items such as an increase in indirect kabob or indirect materials. After analyzing spending variance, the analysis of efficiency variance shall follow. Efficiency variance measures how the operation can utilize the use their production hours. Fixed Overhead Variance is the difference between the actual fixed production overheads incurred during a period. Fixed overhead budget variance or also known as FOH spending variance is the difference between the total fixed overhead and the total fixed overheads actually incurred during the period. Fixed overhead budget variance is favorable when actual fixed overhead incurred are less than the budgeted amount and it is unfavorable when the actual fixed overheads exceed the budgeted amount. Lastly, the volume variance which refers to the differences between the actual quantities sold or consumed and the budgeted amount expected to be sold or consumed. Again, there will be favorable variance if the actual factory overhead is less than the standard or expected factory overhead.
Joint Products
Joint product refers to multiple products generated by a single production process at ten same times. The point at which these products in their separately identifiable form is known as point of separation or split-off point. A point, joint products may either be sold to customers while others may require further processing. Common example of Industries that produce joint products agrichemical companies, refineries, coke manufacturers, or meat processors. The cost incurred to produce joint products is called as joint cost; all joint cost is incurred up to the split-off point. If any cost incurred after this point, it is not considered as joint cost. There are reasons why joint cost should be allocated; it serves as a basis for ten computation of cost of sales and cost of goods left unsold, it can slop serves as a basis for insurance claims, or a basis for the rate regulation. There are three methods to allocate joint cost to joint products: market value method, Average unit cost method and weighted average method.
Why is my entire costing syllabus on read.cash lol hahahaha, I was just studying costing!