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Budget

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Budgets
Rosa M. Oyola-Jerez
American Military University
FINC 405 B004
Professor: Greg Harms
April, 30, 2011

Budgets

Here would be explain what is a master budget? What factors cause budget variances? It would also be explain the difference between a favorable and unfavorable variance, and an example of it would be provided. It would also be explain the difference between static and a flexible budget with an example of it.
A master budget in my words is a recompilation of all different budgets of a company, in other words the master budget would have many other budgets describing the different parts of the operations in the organization. An example of a budget would begin here by the knowledge of the behavior of the cost, that is to say, the answer of a cost to different volumes of the production, turns out to be essential in the planning and the cost control. It can be perceived the behavior of the cost whether since the profitable angle of the business in its entirety. The behavior of the cost plant a practical aspect: upon enlarging or to diminish the production (level of activity) in a center of responsibility with each expense assigned to that center that is going to conduct an individual budget. A budget is a statement of the results expected, aforesaid in numerical terms. It can be considered like a program "aforesaid in I number". In fact, to the financial budget of operations often him he is called "plan of utilities". The budget can be expressed in financial terms; in terms of man-hours, units of product, in machine hours terms or in any another numerically measurable term.
The master budget is a summary of company's plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. In short, this budget represents a comprehensive expression of management's plans for future and how these plans are to be accomplished. It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate affects other budget estimates because the figures of one budget are usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets (“Master Budget”, 2011.). Many factors can cause variance; we have to understand that variance analysis it is looking into what make the difference from one budget to other in a determined period of time, what causes the difference in sales for a particular month or quarter. At the time a variance is analyze everything needs to be check in order to establish what cause the variance in a particular period and then adjust the flexible budgets accordingly. These are unpredictable factors that can cause a company to spend less or more than what was expected in the budget previously made. One factor than can contribute to a variance is the labor cost that can affect the pay rate of an employee and the work hours needed to complete a job; another factor is the cost of materials that can vary from any period of time. To avoid having many variances in the budgets the flexible budget is created so it can foresee this type of problems. A favorable variance is that the actual cost is less than the expected cost. An unfavorable variance could be that the actual cost is higher than the expected cost. An example of this is given in Sales price variance for a company of chips called Mister Munchie.
Changes in sales price are the second factor needed to explain the change in revenues. Changes in selling prices are often the response to changes in product volume. Reduced volume may be combated by reducing the sales price to spur demand. Conversely, the selling price may be increased on popular products if the consumers’ desire for the product outweighs their concern about price. The sales price variance calculated in Exhibit 4 is the difference between the 2007 and 2006 prices, multiplied by the actual quantity sold in 2007 (Bukovinsky, & Talbott, 2010).

Static Budgets generally they devise for a single level of activity. Once it reached this level itself no adjustments required by the variations, are permitted to happen. In this way a control anticipated is performed without considering the economic, cultural, political, demographic or legal behavior of the region where acts the business. This form of control anticipated caused the budget that traditionally utilized the public sector.
They work well for evaluating performance when the planned level of activity is the same as the actual level of activity, or when the budget report is prepared for fixed costs. However, if actual performance in a given month or quarter is different from the planned amount, it is difficult to determine whether costs were controlled (“Flexible budgets”, 2011).
The fundamental principle of a flexible budget is the need of some norm of distributions for a volume given of business, which should be known by anticipated to provide a lead to the real distributions. Recognizing this principle is to accept the fact that each business is an always changing, dynamic company and never esthetics. Both, the fixed budget and the flexible budget, they supply to the management the required information to reach the main objectives of the budget control, by means of forecast. Another way of thinking of a flexible budget is a number of static budgets. For example, a restaurant may serve 100, 150, or 300 customers an evening. If a budget is prepared assuming 100 customers will be served, how will the managers be evaluated if 300 customers are served? To effectively evaluate the restaurant's performance in controlling costs, management must use a budget prepared for the actual level of activity. This does not mean management ignores differences in sales level, or customers eating in a restaurant, because those differences and the management actions that caused them need to be evaluated, too (“Flexible budgets”, 2011).

References
Bukovinsky, D., & Talbott, J. (2010). Variance Analysis Using Throughput Accounting. The

CPA Journal, 80(1), 28-35. Retrieved April 22, 2011, from ABI/INFORM Global.

(Document ID: 1947176031). Flexible Budgets. (2011, April 22).
<http://www.cliffsnotes.com/study_guide/topicArticleId-21248,articleId-21241.html>.
Master Budget. (2011, April 21).

http://www.accountingformanagement.com/the_master_budget.htm

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