Accounting

Management Accounting

Introduction

Budget is a significant term in the field of accounting. It can be regarded as a significant process of the creation of a plan for spending money. A budget is considered as a formal statement regarding the financial resources that are kept for executing certain activities. The plan of spending money is known as budget. This helps in ensuring that an organization has enough money for the activities that are useful. Budgetary control is considered as the budget establishments and successful implementation of the budget and the estimated budget is nearly to close to the outcome of the expenses. This report takes into consideration budgetary control cycle, fixed and flexible budgets, budget variances and causes of cost variances. The various phases of the budget control cycle shall be taken into consideration in the report that provides an in-depth insight into the roles of the governments and other bodies for an effective budget.

Budget Control Cycle

The budget cycle of a business defines the time frame covered by a budget. This can be quarterly, monthly or annually for controlling the costs and streamlining the administrative duties. This helps in controlling the costs that becomes easier for the finance department. There are four significant phases of budget variance. These are budget preparation, budget approval, budget execution and budget audit and evaluation.

Budget Preparation:

Budget preparation starts with budget call that helps in setting the parameters as well as procedures for guiding the agencies for the preparation of a proposed budget. Citizen engagement and program convergence are also considered within budget preparation (Mugambi and Theuri 2014).

Budget approval:

The budget gets approved by a legislative body, a country board of supervisors or a state legislature. At the federal level, the appropriation as well as revenue processes are being fragmented and this involves several committees as well as subcommittees. Apart from raising revenue and spending, the expenditure is handled in many major appropriation bills (Gore et al. 2017). In the preparation and approval phases, certain issues dominate the deliberations of a budget.

Budget Execution:

Budget execution starts with the starting of a budget year for a federal government and state governments. During the execution, many subsystems are in the operation. Taxes and several types of debts are collected. The Internal Revenue Service has the responsibility of setting the tasks at the federal level (Zubenko et al. 2014). The apportionment process is significant in the adjustments of programs that can be made to make a balance between the planned spending and the available revenue.

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Budget audit and evaluation:

The last phase of the budget control process is the audit and evaluation. The main aim of this phase is the considerable changes, but the initial goal was to guarantee the compliance of the executives regarding the provisions of appropriate bills for ensuring honesty in dispensing the public money and the prevention of wastes. Now, the auditing scope has been enhanced for encompassing the effectiveness of the programs of government. At the local and state levels, the issue of organizational responsibility with respect to auditing has found out some sort of solutions (Agoglia et al. 2015). There are alternatives such as the function of auditing being performed by units that is answerable to a body of legislation to the chief executive.

Fixed Budgeting and Flexible Budgeting

Fixed Budgeting:

According to Chartered Institute of Management Accounting, Fixed budget is defined as a budget that is being designed for remaining fixed irrespective to the activity level that is being to be attained actually. Fixed budge is on the basis of single level activity. The performance report of fixed budget helps in comparing the data from the real operations with single level activity being reflected within the budget. Fixed budget is based on assumption, which the organisation will work at the specific activity level as well as the stated production is being achieved. It also recommends that budget is never being adjusted with the change in production level (Rubin 2016).

It is being observed that fixed budget is being used in rare cases in actual field of accounting. The significant reason for not using the fixed budget is that the actual output is very much different than that of budgeted output. In this type of cases, budget cannot be utilised for the cost control purpose. For instance, if the actual production of the organisation is 12000 units and budgeted unit is 10000, then the incurred costs can never be compared with budget relating to the various activity levels. As in case of fixed budgeting, units are being overlooked and therefore, cost to cost comparison may provide misleading results if the units are not being considered. The report of performance that is being prepared within the fixed budgeting hardly discloses the fact that actual costs are higher of lower than that of the budgeted costs. As both costs as well as expenses are being affected highly with the fluctuations in the units of volume with the utilisation of fixed budget. If comparison is being done in the budget costs to that of the actual costs then it will be highly difficult in inferring the success of organisation, with respect to limiting the expenses within the permitted limits. Fixed budget may be employed when the output of the budget is close to that of actual output. It is also significant for noting that the level of the budget must be determined based on the thing to happen and not considering the pasts. However past information regarding budget is highly significant for the planning of future (Rubin 2016). The suitable as well as logical approach is determining the requirements need to be done as well as deciding the way of doing. The process of budgeting might be adopted for estimating the costs for specific tasks, which are being identified.

Flexible Budgeting:

Flexible budget is being defined on the ground of cost accounting. According to the Chartered Institute of Management Accounting, flexible budget is considered as the budget that recognises the differences in between variable, fixed as well as semi-fixed costs that is being designed for changing that is related to attained activity level. Flexible budget is considered as the budget which is being prepared for range of activities that is the activity is more than activity of one level. Flexible budget is a group of alternative budgets for various expected activity levels. Flexible budget is termed as variable budget, step budget, dynamic budget, expense control budget, slide scale budget as well as expense control budget (Ozyurek and Uluturk 2016.). Flexible budget assists in providing information for the managers for output of multiple levels during the deviation of actual output from the expected one. Flexible budget is having the understated significant features like:

  • Covering wide activity range
  • As it is flexible it can be changed easily with change in level of production
  • It also facilitates evaluates as well as performance measurement

Budget Variance

A budget variance can be regarded as the difference between the actual amount and the baseline or budgeted amount of revenue or expense. The budget variance is constructive when this actual revenue is more than that of the budget and when the actual expense is less than the budget. The main reason for the occurrence of this variance is due to inaccurate assumptions and improper budgeting. This can also occur from some uncontrolled or controlled factors. An ineffectively planned budget and increase in cost of labour are classified as controlled factors. The external factors are often termed as uncontrolled factors. These are external and arise from incidents that are outside the company that may include natural disaster. There are certain factors that are responsible for the occurrence of budget variance which are discussed further.

Labour

The cost of labour is affected by the pay rate of budget and the number of working hours of the employees. When the employees take longer time than expected, the company needs to pay more. There is also a budget for the overtime and when the worker gets more or less overtime, budget variance occurs (Sponem and Lambert 2016).

Materials

The cost of materials is also responsible for the budget variance. An organization prepares a budget about the cost of materials and sometimes the suppliers charge different from that of the budget. This leads to the variance in the budget. Another reason regarding material is when the materials get wasted by the workers (Luh and Guo 2016). There are certain primary causes regarding the variance in budget such as errors, changing conditions of business and expectations that have not been met. There can be implementation deviation from mechanical as well as human failure for the achievement of an attainable income. Deviation in measurement is because of the error in measurement of the actual outcome. On the other hand, model deviation occurs due to erroneous formulation in the decision model. The random deviations are due to chance fluctuations regarding a parameter.

Causes of Budget variances

There are 3 fundamental causes for the variances of budget namely errors, changes in the condition of the business as well as the unmet expectations. Errors can be caused by the creators of the budget at the time of budget compilation due to fault in calculations, utilising wrong assumption as well as depending on the stale data. Change in the condition of the business incorporates changing in the entire economical system, changes in the cost of raw materials as well as entry of new competitors in the market forcing to implement change in pricing strategy (Johansson and Siverbo 2014). Changes in political party and regulations can also cause variance in budget. This factor cannot be predetermined and thus this factor cannot be regulated by the organisation.

Causes of Cost Variance

Cost variance is considered as the method of exhibiting the performance of finance of the project. Particularly it is considered as the mathematical difference in between the Budgeted Cost of Work Performed (BCWP) and Actual Cost of Work Performed (ACWP). The causes of cost variances are being explained as follows:

Conclusion

Budget preparation is one of the significant aspects for an organisation to gain success and achieve the desired profit. However, during the preparation of the budget, it is essential to consider the factors like cost variances and budget variances. These two factors are considered to be significant in deviation of the estimated budget from the final one. If the variances factors are being forecasted in an accurate way then there will be minimum variance in the budget. If control can be gained over the cost variance then automatically the control will prevail on the budget variance. Thus the budget control can be established.

Reference List

  • Agoglia, C.P., Hatfield, R.C. and Lambert, T.A., 2015. Audit team time reporting: An agency theory perspective. Accounting, Organizations and Society, 44, pp. 1-14.
  • Gore, D., Axford, H.W., Chapin, R.E., Anderson, L.W., Dorn, K., Atkinson, H.C., Rebuldala, H.K., Lane, D.O. and Gormley, M.M., 2017. Economics of approval plans. Greenwood press (1972).
  • Johansson, T. and Siverbo, S., 2014. The appropriateness of tight budget control in public sector organizations facing budget turbulence. Management Accounting Research, 25(4), pp. 271-283.
  • Khodakarami, V. and Abdi, A., 2014. Project cost risk analysis: A Bayesian networks approach for modeling dependencies between cost items. International Journal of Project Management, 32(7), pp. 1233-1245.
  • Luh, W.M. and Guo, J.H., 2016. Allocating sample sizes to reduce budget for fixed-effect 2× 2 heterogeneous analysis of variance. The Journal of Experimental Education, 84(1), pp. 197-211.
  • Mugambi, K.W. and Theuri, M.F.S., 2014. The Challenges Encountered By County Goverments In Kenya During Budget Preparation. IOSR Journal of Business and Management, 16(2), pp. 128-134.
  • Ozyurek, H. and Uluturk, Y., 2016. Flexible budgeting under time-driven activity based cost as a tool in management accounting: Application in educational institution. Journal of Administrative and Business Studies, 2(2), pp. 64-70.
  • Rubin, I.S., 2016. The politics of public budgeting: Getting and spending, borrowing and balancing. London: CQ Press.
  • Sponem, S. and Lambert, C., 2016. Exploring differences in budget characteristics, roles and satisfaction: A configurational approach. Management Accounting Research, 30, pp.47-61. Zubenko, V.V., Samchynska, I. and Rudyk, A., 2014. Budget Monitoring: Analysis of Budget Execution in 2013.
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