Cost Accounting Analysis

This report discusses the two types of budgets in cost accounting: flexible and fixed budgets. It highlights the advantages of flexible budgets, including their ability to adapt to changes in production levels, control costs, and evaluate company performance. The report emphasizes the importance of preparing flexible budgets to make timely operational adjustments and informed decisions in a dynamic business environment.

COST ACCOUNTING

There are usually two types of budget: Flexible budget and fixed budget. In the fixed budget,
the quantity of production and sales both are pre determined and therefore, there lies a
possibility of variation between the forecasted data and the actual data. It is not possible to
compare the actual expenses and the forecasted expenses because of the difference in the
level of activity and hence flexible budget is prepared (Shukla, Grewal & Gupta, 2006).
A flexible budget which is also known as a dynamic budget changes according to the change
in the level of activity. This budget has various advantages over the static budget. They are-
1. Controlling and evaluating- The unit of production is usually determined
beforehand. However, if the actual unit of production is not equal to the estimated
units the reason is found out. The budget helps the company to control as well as to
reduce cost, as it clearly shows the deviation between the actual and the forecasted
performance of the company over a given period of time. There is a better
understanding of the profits and the evaluation process can be done efficiently using
the budget (Lal & Srivastava, 2013).
2. Adaptation of changes- We know that the business environment is dynamic and
uncertain in nature. Therefore, it is important for the company to adapt to these
changes as soon as possible. The company that uses flexible budget is more likely to
adopt such modifications easily. They are also able to make operational adjustments
on time and take the greatest benefits of it.
3. Inflation and variance- The variable cost of the products keep on changing.
Therefore, it is important to make adjustments whenever required. These adjustments
keep the company updated and help them in taking correct decisions in the
appropriate time.
Although the period is over, it is important to evaluate the performance of the company and
take corrective measures in the future. Therefore, it is important to prepare the flexible
budget.

References:
Lal, J., & Srivastava, S. (2013). Cost accounting. New Delhi, India: McGraw-Hill Education
(India).
Shukla, M., Grewal, T., & Gupta, M. (2006). Cost accounting. New Delhi: Chand.