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(Solved) Flexible Budget - PDF

   

Added on  2019-10-31

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Assignment 2 1ASSIGNMENT 2Student’s NameCourseLecturerInstitutionDate

Assignment 2 2ASSIGNMENT 2Question 1a)Importance of creating and using flexible budgets while evaluating past performance of a profit generating organizationFlexible budget is the form of budget that shows figures for every line item from actual figures as indicated on the organization statements as well as variance between figures. Basically, flexible budget is usually the estimate of what costs and revenues should have been, provided the actual activities for the period. Therefore, whenever it is used in performance evaluation of an organization, the actual expenses are usually compared to what costs should have been for actual activities within the period instead of static planning budget (Horngren 2009). Flexible budget is the form of budget that is permitted to adjust based on variations in assumptions used in creating abudget during the management’s planning process. The main objective of flexible budget is assessing performance of profit centre in that it permits performance report to be created in a meaningful manner. This performanceevaluation helps in comparing actual expenses or costs incurred in production of the products with those expenses or costs that ought to have been incurred, provided the actual activities (Drury 2001). Thus, the main objective of flexible budget is to help inobtaining expenses that ought to have been incurred in a project given the actual activities. In addition, flexible budget is a performance evaluation approach aimed at permitting correct comparison in between actual and budgeted performance. Thus, another objective of flexible budget is to allow for comparison between actual and budgeted performance. For example, comparison is usually distorted in case the actualproduction in a company is 10,000 units which the static budget projects 9,000 units. By reviewing original budget to around 10,000 units, it makes a detailed comparison

Assignment 2 3in between the actual and budgeted costs, for numerous line values shows value relative to similar output. Furthermore, flexible budget is used since it takes into considerations of how variations in activities influence costs (Horngren 2009). For instance, flexible budget is used in creating budgets whenever one is assessing performance of a profit organization since the approach recognizes that budget could be adjusted in order to indicate what costs or expenses should be for actual activities.b)Three other budgets that might be prepared prior to cash budget Cash budget comprises of itemization of anticipated sources and utilization of cash in future period. It is used in ascertaining whether an organization’s operations would give adequate amount of cash in order to meet projected cash needs. In case, this is not the case, the management has to find extra financing sources (Drury 2001). In essence, cash budget is usually itemized in two main segments; that is uses of cash as well as sources of cash. Inputs of cash budgets are basically obtained from numerous other budgets; these include the sales budget, production as well as purchase budgets. Therefore, the three main budgets, which are prepared prior to the preparation of the cash budget are the sales, purchases and production budgets. Sales budget is usually the first budget prepared since all the other budgets and particularly cash budget rely on its information. It comprises of sales in units and selling price per units. Production budget on the other hand is prepared in order to enlighten the management on the totalamount of units that needs to be produced. It comprises of the finished goods units that are to be sold, desired finished goods at the year end and beginning finished goods on hand. c)Operating Cycle Versus Cash Cycle

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