Business accounting

Businessaccounting

Budgetvariances are of great importance to any corporation. Budgeted costsenable the management to set their prices, estimated their projectedsales and profits. These deviations indicate business performancewhich is important in the process of decision making. Using thisinformation the managers can create better plans that can result inorganizational success (Albrecht, 2011).

Tanker-Tech Tether end of year static budget variance report

Tanker-Tech Tethers

Staticbudget variance

Forthe year just ended

Item

Budgeted unit costs

Static budget (

Actual results (

Static Budget variance (

Production and sales

1 Unit

4,000 units

3,900 units

100

F

Variable production costs

$160

$640,000

$631,800

8,200

F

Fixed production costs

$480, 000

$483, 000

(3,000)

U

Total overhead costs

$280

$1,120,000

$1,114,800

5,200

F

Definitedifferences represent favourable variances denoted by F (good news),while negative differences represent unfavourable variationsindicated by U (bad news). From the static budget above theorganization planned for $1, 120,000. However, the actual resultsshowed that the amount incurred was $1,114, 800. This implies thatthe management is $5,200 under budget, thus creating a favourablevariance (Albrecht, 2011).

Theobtained variances are not very useful since the company producedfewer electronic dog collars than the expected. Therefore we need todevelop a flexible budget variance which indicates the values ofcosts allowed at the 3,900 units that were produced.

Tanker-Tech Tethers

Flexiblebudget variance

Forthe year just ended

Item

Budgeted unit costs

Flexible budget (

Actual results (

Flexible budget variance (

Production and sales

1 Unit

3,900 units

3,900 units

0

F

Variable production costs

$160

$624,000

$631,800

(7800)

U

Fixed production costs

$480,000

$483, 000

(3,000)

U

Total overhead costs

$280

$1,104,000

$1,114,800

(10,800)

U

Theflexible budget variance above indicates that the production managerspent more than the allocated amount.Anytimewe have the actual amounts exceeding the estimated values we haveunfavourable variances like in the above table. The negative variancefor the variable production costs indicates that a larger amount wasspent on some variables than the planned amount.

Theflexible budgetary approach is better than the simple static budget(Garden, 2013). The greatest advantage being its adaptability tochanges that occur over time. The real world is dynamic in nature.The flexible budget allows for changes that occur after planning hasbeen completed. In simple terms flexible budgeting is more real whilestatic budgeting is hypothetical. In measuring performance, theflexible budgeting is more applicable. This is because it adjusts thebudgeted amounts and incorporates the actual volumes produced. Fromthe analysis above, we can conclude that the static budgetingapproach reported a favorable variance in the total overhead costswhile in reality there was an unfavorable variance. The staticbudgetary plan can thus indicate that the company is performing wellwhen the firm is underperforming.

References

Albrecht,W. (2011). Accounting,concepts &amp applications.Mason, OH: South-Western/Cengage Learning.

Garden,D. (2013). Flexiblebudgeting and control.London: Macdonald &amp Evans.