Accounting Summary Report Based On Case Study

Cite this

Introduction

Budgeting is an important management tool that is applicable in all organisations despite their size, location, type or any other differing factor. The main aim of budgeting is to help in planning and decision making of whatever kind in the organisation. Budgeting generally entails preparation of forecasts on the expenditure and incomes of the business enterprise (Helfert, 2001, p.67). A budget therefore acts as a guiding tool on how the operations of the organisation are to be carried out efficiently. There are different types of budgets with each serving a specific purpose. Some of them include; fixed budget, flexible budget, operating budget, financial budget and cash flow budget among others. This report will therefore look at flexible budgeting as well as areas that raise concern in budget planning.

On-Time Delivery!
Get your customized and 100% plagiarism-free paper done in as little as 3 hours
Let’s start
322 specialists online

Budgetary areas that raise concern in the budget planning

The process of budget planning has proved to be a hectic one for many management accountants. The process involves many tasks to be carried out so as to have a complete and effective budget. In budget planning there are several areas that are of concern in order to achieve the objective of budget planning such that in the end the business enterprise does not spend more or less than what was planned.

At the start of the planning process of a budget, the management accountant must be aware of the available income of the organisation and its sources. For most business enterprises including Competition Bikes, their source of income is usually the sales they make. The major sources of income according to their budgets include; interest income and Cash receipts among others. It is important to note that not all budgets are concerned with income, others just look at the way the company manages things like raw materials, expenses, cash flows, sales just to mention but a few. Another important area of concern in budget planning is the expenditure of the business enterprise. Most of the expenditure is in the form of costs such that there is fixed cost and variable cost. Fixed costs will remain the same throughout the trading period while the variable costs keep on fluctuating. A close look at the budgets of Competition Bikes Company the following costs can be established; cost of raw materials, quality control costs, depreciation, advertising, research and development, administrative salaries and many other costs.

As a matter of fact, each specific budget will have specific areas of concern. For example, the budgets of competition bikes have a target sale of 3510 units This is an important area of concern when budgeting as the value should lie within the expected range or else the budget will be overestimated or underestimated by a big range. In the sales budget, the selling price is an area of concern because it keeps on fluctuating as per the market forces. In the raw materials budget of Competition Bikes the expected bikes to be produced is an area of concern because if the company produces more or less than it can sell, there might be a surplus or deficit of the bikes in the market respectively.

Last but not least, the management accountants should be able to separately prepare the different types of budgets in accordance to the specific operations of the business enterprise. That is why Competition Bikes Company, which is in the manufacturing sector has raw materials budget, schedule of expected cash disbursements, production budget, sales budget etc.

The flexible budget and its variances

A flexible budget just like the other budget types is a management tool used to evaluate the performance of the business enterprise (Helfert, 2001, p.67). Unlike other budgets, a flexible budget is usually prepared at the end of the trading period. This is because it is used to make adjustments on the static budget based on the output level of the business enterprise. An important feature of the flexible budget is the fact that it has variances that are manifested through a computation of the difference between the flexible budget figure and that of the actual output results. Once the difference has been obtained, the variance is either classified as favourable or unfavourable depending on the outcome.

Areas of concern in the Competition Bikes Inc. Flexible budget and Recommendations

The flexible budget of Competition Bikes Company has a number of areas of concern and especially those whose variance amount is unfavourable. The net variation in the net sales is unfavourable by a negative variance amount of (119,600) since the actual amount exceeds the planned amount by the same figure. This is an indication that the sales were less than expected a situation that could either be brought about by overcastting the expected demand or the demand going down as a result of effect from the factors of demand. The corrective action to be taken is to adjust the figure of the planned output of products to a figure less than or equal to that of the actual output. The variable selling expenses also depicted an unfavourable variation figure of (1,615). These selling expenses could have been affected by the total output being less than the budgeted figure or as a result of increased market costs of the advertising and freight costs. This could be corrected by budgeting for a higher value of the total output while having provisions for any changes in the market costs.

Yes, we can!
Our experts can deliver a custom Accounting Summary Report Based On Case Study paper for only $13.00 $11/page
Learn More
322 specialists online

In addition, the cost of Transportation is also higher than the planned amount which could also be as a result of price changes in the market as a result of either increase in petroleum prices or taxes. Therefore it has an unfavourable variation which increases the overall cost of operations. Since the cost has exceeded the amount that was set, it will force the company to supplement the additional cost with other sources of income hence reducing the effectiveness of the budget. All the aforementioned variances result to unfavourable figures of the contribution margin as well as the operating income.

On the other hand, the favourable variations of the flexible budget are also areas of concern. This is because they depict proper planning of the budget process. The favourability is two ways: One, the planned figure may be lower than the actual figure and vice versa. For example, the direct materials used were less than those that the company had planned for. This is favourable as the remaining materials can be forwarded to the next trading period (Needles et al, 2007, p.132). The same applies to the direct labour amount which is also less than the planned amount. Therefore the same course of action can be taken by keeping the remaining direct labour amount for another trading period. In addition to the two costs mentioned above is the manufacturing overhead-variable cost. All of these result into a favourable variance in the total variable cost. This way, the company will be operating within its budget hence depicting efficiency in the budget planning process.

The other state is that of zero variation whereby the resulting outcome equates the planned amount. From the flexible budget of Competition Bikes Company, costs like depreciation, advertising, payroll services, employment taxes and administrative salaries among others. This depicts effective forecasting of the budget planning department.

Application of the concept of management by exception to variances

Management by exception is one of the policies used by the management of an organisation to establish those issues that deviate from the standards of the organisation. This concept is therefore applied to variances to analyse their deviation. As stated above, deviations are normally computed as the differences between actual and planned output. It is a very important approach to management because the management can easily know what areas of its business they should concentrate on (Needles et al, 2007, p.132). This makes the management be able to come up with policies and intervention measures that can minimize the deviations from the standards of the company. For example, if planned sales are considerably higher than actual sales, the management may come up with a policy to concentrate more on advertising in order to bridge the gap between actual and planned sales. However, it is argued that it is not all variances that are worth investigating. For example, it will be of more benefit investigating the unfavourable variances as compared to the favourable ones. This is because if the management indulges on investigating all the variances it may be a waste of time. In conducting the variances investigation, the management may adopt the technique of using a statistical control chart. This chart is graphical showing the variations from the zero point; hence the management is able to identify the favourable and unfavourable variances. Thus, the application of the management by exception is of great essentiality in the evaluation of the variances of a flexible budget.

Reference List

Helfert, E. (2001). Financial Analysis: Tools and Techniques. McGraw-Hill Professional.

Needles, B. Powers, M. And Crosson, S. (2007) Financial and Managerial Accounting. Cengage Learning

Cite this paper

Select style

Reference

BusinessEssay. (2022, February 18). Accounting Summary Report Based On Case Study. Retrieved from https://business-essay.com/accounting-summary-report-based-on-case-study/

Reference

BusinessEssay. (2022, February 18). Accounting Summary Report Based On Case Study. https://business-essay.com/accounting-summary-report-based-on-case-study/

Work Cited

"Accounting Summary Report Based On Case Study." BusinessEssay, 18 Feb. 2022, business-essay.com/accounting-summary-report-based-on-case-study/.

References

BusinessEssay. (2022) 'Accounting Summary Report Based On Case Study'. 18 February.

References

BusinessEssay. 2022. "Accounting Summary Report Based On Case Study." February 18, 2022. https://business-essay.com/accounting-summary-report-based-on-case-study/.

1. BusinessEssay. "Accounting Summary Report Based On Case Study." February 18, 2022. https://business-essay.com/accounting-summary-report-based-on-case-study/.


Bibliography


BusinessEssay. "Accounting Summary Report Based On Case Study." February 18, 2022. https://business-essay.com/accounting-summary-report-based-on-case-study/.