Section A Other Types of Budgets This flexible budget will now be used along with the static budget for the periods variance reporting. The only difference between the static budget and the flexible budget is the volume used to calculate variable revenues and expenses. The static budget is prepared for a planned sales volume of 24,000 units, whereas the flexible budget is prepared for a planned sales volume of 20,000 units, which is the actual number of units sold. The variable revenue and cost items in the flexible budget have been adjusted downward for the sales that were lower than planned. But note that the budgeted fixed cost amount is the same in the flexible budget as it is in the static budget. For each variable revenue and cost, the static budget amount has been divided by the static budget volume of 24,000 to find the budgeted per unit revenue/cost, and that per unit revenue/cost is multiplied by the actual number of units sold - 20,000 - to calculate the flexible budget amount. The fixed cost static budget amount of $552,000 has been simply carried over to the flexible budget column unchanged. The flexible budget can be prepared only after the end of a period, when the actual sales volume for the period is known. Therefore, a flexible budget would be prepared for each month or each quarter, as well as for the year-end but only when the actual volume for that period is known. We will talk more about flexible budgets in the section on Performance Management (Variances). Other Types of Budgets Project Budgeting As the name suggests, a project budget is a budget for a specific project. As such, the time frame of the budget may be very short or more long-term, depending upon the length of the project. 0 Project budgets are fundamentally different from the master budget and the flexible budget. The master budget or the flexible budget covers a distinct time span, such as the month of January. In contrast, a project budget covers an identifiable project that has its own time span. That time span may be as little as a week or it may be as long as several years. The focus in project budgeting is on one separate project. Examples of projects that might be budgeted for separately are capital budgeting projects such as the purchase of a new machine or construction of a new plant. Or, a project may be the development and testing of a new product, acquisition of another company, a marketing plan for entering a new geographical area, or a budget for a long-term contract. Projects must be planned over their entire life spans and should be viewed as special commitments. Their budgeted amounts must be integrated into the master budget of the company for the relevant period or periods. When developing a project budget, it is critical to include all of the costs that will be required for the project. Though this seems very obvious, it is critical in the identification of indirect costs and overheads that will be allocated to the project. A long-term project budget for the introduction of a new product can also be called a life-cycle budget. A life-cycle budget is one that budgets incomes and expenses for one specific product throughout its entire life cycle - from development through its decline. This enables a company to see the cash flows that will result from the product over its entire life. Additionally, the life-cycle budget allows the company to set a price that will cover not only the production costs, but also the development costs by identifying all of the costs associated with this product.
Posted on: Mon, 10 Mar 2014 08:57:38 +0000
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