Managerial Accounting: Budget and Variances Research (Case Study Sample)

Managerial Accounting
Author’s Name:
Institutional Affiliation
Managerial Accounting: Budgeting
Budgeting plays a vital role in the management of a company. These financial plans not only serve the role of communicating the company’s 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 variances
The 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 company’s 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-operating 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 variances
Budget variances shed 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 month’s 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