Business Budgeting Process

Business Budgeting Process

Explain the budgeted income statement.

The flexible budget has three parts; the planning budget, the flexible budget, and the variance. The planning budget is the estimated unit cost of an activity without considering future circumstances. On the other hand, the flexible budget represents the actual total cost. The difference between the flexible and the planning budget is the variance.

For instance, in this case, the budgeted/estimated revenue is $158,400, while the actual income is $172,800. The variance, therefore, is 14,400, which means the business has enough money for its operations. In other words, the company has a favorable variance.

Estimated wages and salaries are $89,700, while the actual salaries are $94,500. Hence, the company has a shortage/unfavorable variance of $4,800. The company does not satisfy its wage needs.

The planned total expenses are $152,200, while the actual costs are $160,900. Therefore, the actual expenditure exceeds the planned spending by $8700. The company incurs more than it intended.

Outline how you would create annual budgeted financial statements

Annual budgeted financial statements refer to complete sets of financial statements, including the balance sheet, cash flow, statement of retained earnings, and income statement. They are derived from the annual budgeting model, hence must meet its expectations.

To prepare an income statement, for instance, one must first create all operating budgets. Operating budgets include direct labor, direct materials, administrative expenses, and manufacturing overhead. It is worth noting that the budgeted income statement is primarily a product of the other budgets; hence, its accuracy relies on the accuracy of the operating budgets. The income statements help a company realize whether its financial goals are realistic. Consequently, the budgeted income statement is compared with a balance sheet to reveal unnecessary financial goals. Such a comparison can, for instance, show whether a business is likely to incur debt or not. If the figures show that a company may need to incur debt, then one may have to start all over again to harmonize it.

Analyze the difference between a static budget and a flexible budget, including the importance of each.

Differences

A static budget is one where both income and expenditure are predetermined. Regardless of the fluctuations in income or spending, the budget remains the same. In other words, a static budget is based on one income level. The static budget is mainly used for planning purposes in organizations (Shim et al., 2012).

On the other hand, a flexible budget changes progressively based on changes in the volume and activity of costs. Unlike the static budget, a flexible budget includes variable costs per unit rather than the total cost of an entire organization’s activities. A flexible budget is more useful when measuring the efficiency of a manager compared to a static budget (Shim et al., 2012).

One key difference between a static and flexible budget is its scope. A flexible budget may correctly ascertain the costs of activities even when circumstances change, but the case is different for a static budget. Cost cannot be ascertained when circumstances change.

Also, pre-requisites for setting up the two budgets differ. In a static budget, the cost of activities is prepared without considering their variable nature. However, in flexible budgets, the variable nature of costs in the real world is considered.

Importance

Static budget

A static budget helps organizations plan their output and input more effectively. As a result, the organization can manage revenue, cash flows, and expenses. Besides, the static budget functions as the organization’s blueprint, thus allowing the management to monitor day-to-day activities. The fixed budget also helps companies to work on long-term plans while monitoring their bottom line. Also, a static budget is so simple that any stakeholder can monitor it. Finally, s static budget helps the organization avoid overspending, as it matches spending with revenue (Ekholm & Wallin, 2011).

Flexible budget

A flexible budget, on the other hand, allows the organization to take advantage of opportunities. If sales were to increase, a company can allocate more money to boost marketing efforts. A flexible budget also accommodates variance in profits margins and costs. In case the costs of certain inputs increase, the management can note the change and make necessary adjustments (Ekholm & Wallin, 2011).

Evaluate the importance of reading and correctly interpreting budgeted financial statements.

The primary purpose of a budget is to evaluate performance. This is achieved through tracking expenses while checking whether the expenses are meeting organizational goals. For instance, analyzing the prior year’s budget can help a business realize pitfalls and improve on them (Ho, 2018). Among others, fundamental questions that emerge when analyzing previous year budgets include whether the profits were desirable. Also, the process helps the organization realize the revenue and expenses that were featured on a budget. Henceforth, comparing the actual budgetary results against estimated budgetary results can help the company plan its future and reduce uncertainty.

Variance analysis is also used to interpret budgets. The process is not necessarily meant to identify problems; rather, it helps an organization realize where the problem might be. Variance analysis is used to classify budgets into favorable or unfavorable variances. Favorable variance is when the revenue exceeds expenditure, while unfavorable variance is when the spending exceeds income (Ho, 2018).

References

Ekholm, B.-G., & Wallin, J. (2011). The Impact of Uncertainty and Strategy on the Perceived Usefulness of Fixed and Flexible Budgets. Journal of Business Finance & Accounting, 38(1-2), 145–164. https://doi.org/10.1111/j.1468-5957.2010.02228.x

Ho, A. T.-K. (2018). From Performance Budgeting to Performance Budget Management: Theory and Practice. Public Administration Review, 78(5), 748–758. https://doi.org/10.1111/puar.12915

Shim, J. K., Siegel, J. G., & Shim, A. I. (2012). Budgeting basics and beyond. Wiley.

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You are hired as a new cost accountant at Ciccetti Corporation. The company manager, David, is having a meeting with you in his office. He brought you this budgeted income statement that was completed by the previous cost accountant. David asks you to provide him with a report explaining the statement in clear, straightforward language and how you plan to handle the annual budget.

Business Budgeting Process

Write a 2–3 page report in which you:

Explain the budgeted income statement.

Outline how you would create annual budgeted financial statements.

Analyze the difference between a static budget and a flexible budget, including the importance of each.

Evaluate the importance of reading and correctly interpreting budgeted financial statements.

Use three sources to support your writing. Choose sources that are credible, relevant, and appropriate. Cite each source listed on your source page at least one time within your assignment. For help with research, writing, and citation, access the library or review library guides.