Cost Accounting, Flexible Budget, Variance Associated (Essay Sample)

Cost Accounting
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Cost Accounting
Definition of flexible budget
This is simply defined as that budget that is flexed or adjusted in line with changes in volume of the activities. It is stated that “it is a sophisticated form of budget that is more useful than a static budget” (Harris & West, 2007, p. 123). At times this budget is important for firms that seek to have improvement in their set goals and growth. This form of budget can be dangerous if not well research as it may lead to overspending. It is a form of budget that is therefore suitable for fashion or seasonal businesses, quotation, tendering, soft drink and ship building.
Most important consideration in investigating variance
When dealing with variance it means seeking to understand why there are certain deviations from the budget. “The most important consideration should involve looking at the adverse variances and the reason as to why they have occurred contrary to the set provisions of the budget” (Harris & West, 2007, p. 128). Adverse variances have a negative impact on cost minimization efforts by the firm, and therefore the management or creators of the budget have to determine why such variances actually occurred.
Benefits of monitoring direct cost variances
It is important for business to monitor direct cost variance in order to ensure that decisions that are being made by the manager are understood. Direct cost variances have an impact on the pricing and profitability of the company hence a closer look has to be done in order to ensure that prices and profitability are not adversely affected by such variances.
It is proper to say that variances that occur under this category are due to underestimation or the overestimation of the prices set during the process of budgeting. This means that when there is a favorable direct cost budget, the budget crafters have overestimated the budgeted direct cost in relation to the actual direct cost. When there is adverse variance in direct cost it means that the crafter did underestimate the direct cost compared to the actual cost.
There are those variances that are expected yet there are those which occur due to difference in pricing, “it means that the management has to investigate such variances and determine how they occur and how they can be handled” (Harris & West, 2007, p. 123).
Benefits of monitoring overhead variances
In simple sense, it is right to state that overhead costs are ongoing expenses that cannot be attached to the direct material and labor or third party expenses that are met by the final consumer. When it is monitored it is beneficial in the sense that it does helps in controlling of costs through eliminating expenses that are highly unnecessary. When the variance in overhead cost is larger “it means that the...