Identify the main purpose of a flexible budget for managers.
Flexible budget recognizes the relativity of fixed and variable costs and how they change based on the output or turnover, hence flexible budget accommodates the changes in the values. It is also known as variable or dynamic budget (Nayab, 2010).
Purpose of a flexible budget for managers and how this information helps managers to make decisions:
Managers often face situations and opportunity those are not planned for and flexible budget help them plan for the potential changes based on changes in production cost, sales volume etc.
Flexible budgeting is essential for the manager because in the real world the fixed budget does not hold up in most of the cases due to employee unavailability or a waste of material during production. A flexible budget is a tool to accommodate the actual data and get the actual performance then the manager can compare it with budgeted performance.
What is a price variance? What is a quantity variance?
Price Variance is the difference between actual and standard prices of one unit multiplied by used input quantity (Businessdictionary, n.d.).
Price variance = (actual price – standard price) x actual quantity
The manager can use price variance to determine the difference between actual and expected input prices. From the equation above if we get the positive result that means the actual price is more than what was anticipated and if the price variance is negative that means actual price lower than anticipated.
Quantity variance is the difference between the actual material usage and the budgeted or expected material usage. This can be calculated in terms of actual quantity of material and hence in dollar terms too ( accountingformanagement, n.d.).
Quantity variance = (Actual quantity used × Standard rate) – (Standard quantity expected × Standard rate)
The manager can determine if the quantity variance is positive or negative by applying the formula above. If quantity variance is positive then the manager needs to determine the reason behind the extra cost because of more quantity of material usage. And the reason could be the excessive waste or additional production of units, remain to be found out by the manager.
What is the purpose of using standard costs? And how this information helps managers to make decisions:
Before executing the actual plan the standard cost helps manager set the floor of expectations and later based on the standard cost the manager can gain insights into cost, price, profit etc
Standard costs are used primarily to set the budget
Standard cost help managers to measure efficiencies
Managers can use standard cost to identify where cost reduction is possible
Managers use standard costs to expedite cost reporting
With this, it is easy to assign the cost to material and hence finished product
With the standard cost of direct material and direct labor, managers can use the information to draft contracts and set sales price
Retrieved on 3/9/2018. Retrieved from http://accountingexplanation.com/purposes_of_standard_costs.htm
Retrieved on 3/9/2018. Retrieved from https://www.accountingformanagement.org/direct-materials-quantity-variance/
Retrieved on 3/9/2018. Retrieved from http://www.businessdictionary.com/definition/price-variance.html
Nayab, N.( September, 2010). What is a Flexible Budget?. Retrieved from https://www.brighthub.com/office/finance/articles/88382.aspx