Flexible Budget to Determine the Value of Variable Cost
Added on 2020-04-01
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ASSIGNMENT 2
Solution 1: A: Flexible budget to determine the value of variable cost at different expenditure level. Variablecost is depended on the capacity used and revenue generated. Flexible budgets help to determinethe various variable costs that are associated with different level of production. So it can be saidthat with the help of flexible budgets past performance of the organization can be calculatedthrough evaluating the actual usage and budgeted usage on same level of activity. In evaluatingthe performance it will provide details of change in variable costs and semi variable costs. Therecan many reasons that make flexible budget an essential part to evaluate the part performance ofthe manufacturing business. Flexible budgets are beneficial where costs change frequently withthe level of business activity (Pratt, 2003). For example, in the manufacturing business thebudgeted overheads are segregated and added as fixed cost and other variable costs are directlylinked with the level of revenue. The objective of such performance evaluation will be toevaluate the variances under actual expenses and budgeted expenses. The variances will help tofocus on the particular area of expenses and all action will be taken to control the cost (Nortonand Porter, 2008).B: Cash Budgets are prepared to show how the cash flows within the business. The purpose ofcash budget is to check the requirement of cash to fulfill the requirement of working capitalwithin the business operation. Cash budget is typically dependent upon the three other budgetsthat are prepared before making the cash budgets. Cash budgets firstly needs the cash receiptsthat directly comes from the sales budgets, secondly cash budget need cash expenses that comesfrom the purchase budget and lastly any cash expenses (fixed or variable) can be taken from theprojected profit and loss account and projected balance sheet. Mainly cash receipts are received after or in 1 or 2 months of sales have been made. So itimpacts the cash budget directly as any variation in prediction of cash receipts will directlychange the cash requirements. Similarly in case of cash payments there will be flow of cash tothe suppliers depending upon the cash credits they provide. So any change in cash credits it willdirectly impact the cash budget (Besley and Brigham, 2008).C: Operating cycle refers to the average time taken for receipts of cash from the sale of inventoryafter the acquisition of inventory. Operating cycle is different from the cash cycle as cash cycle
is influenced with many other factors while operating cycle in linked with the sale of inventoryand cash receipts from inventory. Short operating cycle means business will receive the cashvery frequently. On the other hand cash conversion cycle means days required or taken toconvert the business resources into cash flows. Cash cycle is very important for any business asit tells time period taken from each dollar value of inventory is put to the production and salesmade before any cash is realized (Shim, Siegel and Shim, 2011). Working capital refers to thedifference of short term assets and short term liabilities. So the difference of these two theseitems is working capital which is needed to finance the business operations. Cash cycle meanstime needed to convert resources back into cash. The difference in value of cash received andcash expenses will help to finance the working capital requirement and also generates the income(Besley and Brigham, 2008).D: A Government organization varies from not profit organization to profit sharing basisorganizations. Not profit organizations work for the public interest with a motive to earn theprofits. Accounting in the non government organization will reveals only the cash received andcash paid at various public benefit transactions. Private companies are required to report thegovernment and the top management about the profitability of the company. In case ofgovernment there are no such liabilities, so therefore it is not compulsory to follow each andevery step for accounting in government organization (Bierman and Smidt, 2007). E: Cost accounting refers to the process of collecting the information about the cost of products,recording them properly, classifying them accordingly, and lastly analyzing and summarizing thevarious elements of cost to provide the management with best alternative they can adopt formaking the policies regarding the cost efficiency and coat capabilities. Under the costing systemthere are many costing process such as activity based costing system, traditional costing system,and standard costing etc. These systems provide information regarding the cost behavior and costcontrol (Pratt, 2003). Solution 2:Given Details in the questionBudget for the yearDirect labour costs for the year $ 537,600.00 Manufacturing overheads for the year $ 598,080.00
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