Managerial Accounting Budget and Variances Research - 1100 Words

Managerial Accounting: Budget and Variances Research (Case Study Sample) Content: Managerial AccountingAuthors Name:Institutional AffiliationManagerial Accounting: BudgetingBudgeting plays a vital role in the management of a company. These financial plans not only serve the role of communicating the companys goals and objectives, but they also motivate employees and managers towards common targets CITATION Ben061 \l 1033 (Bento, 2006). Given these facts, the aim of this report is to discuss the operating budget and accompanying variance analysis for Peyton Approved.Budget variancesThe preparation of a budget often begins with the decision of what costing system is most suitable for the company. In this case, the firm has the option of using previous records as a means of establishing a base on which the current budget will be built. This method is fast and easily understood. It also ensures consistency in the company because employees understand the grounds on which budgets are prepared. However, the method is faulted on the basis that it promotes laxity in investigating cost overruns. Therefore, a company that uses historical data as the only means of information in budget preparation often finds that it has costs that it does not need to incur, thus promoting inefficiency. Alternatively, the company could estimate costs by conducting fresh research into various heads. The approach is referred to as zero-based budgeting and is argued to improve a companys efficiency. This stems from the fact that each vote head is determined afresh each time there is need to prepare a budget. However, zero-budgeting is resources consuming in terms of time and money. It also leads to inconsistencies and confusion during the process, which results in poor communication to key stakeholders. Despite these differences, both approaches lead to the creation of a standard or static financial plan on which performance will be assessed against.There are several static budgets at Peyton Approved including a sales, production, manufacturing, and non-op erating budgets. These budgets lead to the creation of a base line on which actual performance is to be assessed. Variances between the standard budget and actual results leads the management having to investigate causes and take appropriate action. In this case, two major variances emerge with regard to labor and materials.The direct materials budget indicates that there was zero variance between planned and actual price. However, the company consumed more raw materials than was budgeted. The result is that there was an unfavorable efficiency variance of 3,620 units that led to an overall variance of $20,305. On the hand, there was a favorable price variance in the labor budget of $1 for every hour. However, there was an unfavorable efficiency variance of 4,400 as the company used more hours producing the budgeted units. The result is that there was an unfavorable labor budget variance where the firm consumed $37,400 in excess of the budget.Investigating variancesBudget variances s hed light into possible inefficiencies within the company. For example, the labor variance at Peyton Approved could be an indicator that the company took too much time reassembling its production line in order to manufacture a new type of supply. It could also be an indicator that there were more than enough people working on the production floor who clocked in more hours. On the other hand, it would be necessary to investigate the reason behind the company using excessive materials during production. The variance could be the result of inaccurate information during the process of making the budget. However, it is also likely to the result of the company selling more products than anticipated. A third cause of variance in the material budget could be wastage on the production line.The aim of this report was to discuss the operating budget and accompanying variance analysis for Peyton Approved. It is found that the budgeting process creates a solid ground on which to assess a company s performance through the use of variances between actual results and the financial plan. The study also indicates that Peyton Approved should seek to investigate material and labor variances in order to better its production efficiency.Sales Budget Peyton Approved Sales Budgets July, August, and September 2015 Budgeted Units Budgeted Unit Price Budgeted Total Dollars Jul-15 18,000 18.00 $324,000 Aug-15 22,000 18.00 $396,000 Sep-15 20,000 18.00 $360,000 Total for the first quarter 60,000 18.00 $1,080,000 Production Budget Peyton Approved Production Budget July, August, and September 2015 July August Sept. Total Next months budgeted sales 22,000 20,000 24,000 0 Percentage of inventory to future sales 0.70 0.70 0.70 Budgeted ending inventory 15,400 14,000 0 16,800 Add budgeted sales 18,000 22,000 20,000 Required units to be produced 33,400 36,000 36,800 Deduct beginning inventory (Previous month ending inventory) -16,800 -15,400 -14,000 Units to be produced 16,600 20,600 22,800 Manufacturing Budget - contains raw materials budget, direct labor budget, and factory overhead budget Peyton Approved Raw Materials Budget July, August, and September 2015 July August Sept. Total Production budget (units) 16,600 20,600 22,800 Materials requirement per unit 0.5 0.5 0.5 Materials needed for production 8,300 10,300 11,400 Add budgeted ending inventory 2,060 2,280 1,980 Total materials requirements (units) Deduct beginning inventory (previous month ending inventory) -4,600 -2,060 -2,280 Materials to be purchased 5,760 10,520 11,100 Material price per unit 7.75 7.75 7.75 Total cost of direct material purchases $44,640 $81,530 $86,025 Peyton Approved Direct Labor Budget July, August, and September 2015 July August Sept. Total Budgeted production (units) 16,600 0 23,400 0 17,200 Labor requirements per unit (hours) 0.5 0.5 0.5 Total labor hours needed 8,300 11,700 8,600 Labor rate (per hour) 16.00 16.00 16.00 Labor dollars $132,800 $187,200 $137,600 Peyton Approved Factory Overhead Budget July, August, and September 2015 July August Sept. Total Budgeted production (units) 16,600 23,400 17,200 Variable factory overhead rate 1.35 1.35 1.35 Budgeted variable overhead 22,410 31,590 23,220 77,220 Fixed overhead 20,000 20,000 20,000 60,000 Budgeted total overhead $42,410 0 $51,590 $0 $43,220 $0 137,220