8-What is a flexible budget? Explain how a flexible budget increases the usefuln

Question

8-What is a flexible budget? Explain how a flexible budget increases the usefulness of budgeting as a means of evaluation performance. 9-An article in BusinessWeek state that approx one-third of the total federal budget is considered "controllable" What is meant by a budgeted expenditure being controllable? Give 2 examples of government expenditures that may be considered "noncontrollable" 10-Explain why companies that undergo periods of rapid growth often experience cash flow problems 11-Explain how to compute the average collection period and why it is a critical factor in creating the collections of receivables budget 12-List and briefly explain the 2 budget philosphies 13-What is the general rule for deciding the length of a budget period 14-How is the budgeted production in units calculated for manufacturing companies

Explanation / Answer

A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity. Assume that a manufacturer determines that its cost of electricity and supplies for the factory are approximately $10 per machine hour (MH). It also knows that the factory supervision, depreciation, and other fixed costs are approximately $40,000 per month. Typically, the production equipment operates between 4,000 and 7,000 hours per month. Based on this information, the flexible budget for each month would be $40,000 + $10 per MH. Now let’s illustrate the flexible budget by using some data. If the production equipment is required to operate for 5,000 hours during January, the flexible budget for January will be $90,000 ($40,000 fixed + $10 x 5,000 MH). If the equipment is required to operate in February for 6,300 hours, then the flexible budget for February will be $103,000 ($40,000 fixed + $10 x 6,300 MH). If March requires only 4,100 machine hours, the flexible budget for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH). If the plant manager is required to use more machine hours, it is logical to increase the plant manager’s budget for the additional cost of electricity and supplies. The manager’s budget should also decrease when the need to operate the equipment is reduced. In short, the flexible budget provides a better opportunity for planning and controlling than does a static budget. Static and flexible budgets are two separate yet interconnected parts of a solid business accounting regimen. Static budgets are a good way to keep production costs on track, and encourage the staff in charge of purchasing to make the greatest possible effort to obtain the required goods at the lowest possible price. A flexible budget can sometimes account for an entire company budget; however, it is best used as part of a larger overall budget in a subsection role, such as a variable expense account.

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