Saturday, April 19, 2008
It was such a tiring, long day. I sat for a total of about 6 hours worth of lecture on management accounting. I learned a lot from the lecture but it was not very easy to concentrate on the lessons and I almost fell asleep midway through the lecture.Anyway...
Fixed Budget is mainly used in the planning stage to define the broad objectives of management. Flexible budget, on the other hand is prepared for the volume of activity actually achieved, in other words the controlling stage. The reason why we had flexible budget is because for most of the time, the level of activities differ and as a result, the fixed budget differs by a lot from the actual result. For instance, in an event when the actual production doubled as compared to fixed budget, the variable cost for the production also doubled and the difference between the variable cost differed by a lot. When the fixed budget is brought to the higher management to compare with the actual results, the management will ask why the budget and actual differ by so much, making an assumption that the total actual production should be the same as budgeted production and held someone liable for it which would be the production manager since he is in charge of the production. This is not fair to the production manager, hence, we should introduce flexible budget during the controlling stage.
Next....
Steps in the preparation of the flexible budgets:
1. Analyse all the cost into fixed and variable category
2. Break up semi-variable cost into fixed & variable cost if necessary using high-low method.
3. Flexible the variable cost and do not flex the fixed cost.
4. Prepare the Flexible Budget also known as Performance Statement.
Labels: accountancy, accounting, budget, management accountancy, managerial accounting
what we could have been, 9:17 PM.
