Budget A budget is quantitative expression of proposed plan of action by the management for the specified period.

It also aids to coordinate what needs to be done to implement the plan. A budget typically include both financial and non financial aspect of the plan A financial budget quantifies management expectation regarding income, cash flows and financial position. Static budget The static budget or master budget is based on the level of output planned at the start of the budget period. The master budget is called a static budget because the budget for the period is developed around a static planned output level. Flexible budget A flexible budget calculates budgeted revenue and budgeted costs based on the actual output in the budget period. The flexible budget is prepared at the end of the period. The difference between the static budget and flexible budget is that the static budget is prepared for the planned output where as the flexible budget is based on the actual output. Budgeting cycle The budgeting cycle is typically the processes or the steps taken during the course of the budget period. The various steps would comprise the past performance, anticipated changes, assumption for the budget period etc. Advantages The advantages of budget are It promotes coordination and communication within the company It provides framework for judging performance. It motivates managers and other employees

Time coverage of budget Budgets have typically a set period such as a month, qty and or year. The set period can also be broken into sub period for example. A twelve month cash budget can be broker into 12 monthly periods. The most frequently used budget period is one year which sub divided into months and quarters.

A budget could also be rolling budget where a month, qtr or year to the period is added. Variance A variance is difference between actual result and expected performance the expected performance also called budgeted performance which is the point of reference for making comparison. Variances lie at the point where planning and control function come together. It also enables the management to focus attention on the area that are not operating as expected Variance is also used for performance evaluation and to motivate managers to perform. Sometimes variances also suggest the company should consider a change in the company.

Static budget variance A static budget variance is the difference between the actual result and the corresponding budget amount in the static budget.

A favorable variance has the effect when considered in isolation, of increasing operating income relative to the budgeted amount.

An unfavorable variance has the effect, when viewed in isolation of decreasing operating income relative to the budgeted amount. Unfavorable variance area also called adverse variance.

Sales volume variance Sales volume variance is the difference between a flexible budget amount and the corresponding static budget amount. Sales budget variance = (flexible budget amount - static budget amount)

The flexible budget variance The flexible budget variance is the difference between an actual result and the corresponding flexible budget amount. Flexible budget variance= (Actual result flexible budget amount)

Price variance A price variance is the difference between actual price and budget price multiplied by actual quantity, such as direct material purchased or used. Price variance= (actual price of input budgeted price of input) x actual quantity of input

Efficiency variance Efficiency variance is the difference between actual quantity of input and the budgeted qty of input multiplied by budgeted price. The idea here is that the company is inefficient if it uses larger qty of input than the budgeted qty. Conversely the company is efficient if it uses a smaller quantity of input than the budgeted qty. Efficiency variance= (actual qty of input used budgeted qty of input allowed for actual output) x budgeted price of input

Example Information regarding elegance 2009 Particulars 1 Units of elegance produced and sold 2 3 4 5 6 7 Batch size (units per batch) Number of batches(line1/line2) Material handling labor hrs per batch Total Material handling labor hrs(line3xline4) Cost per material handling labor hr Total materials handling labor costs (line5xline6) Static budget amount Actual result 180000 151200 150 1200 5 6000 Rs140 Rs 840000 140 1080 5.25 5670 Rs145 Rs 822150

Flexible budget variance= (actual costs flexible budget cost) = (5670 hrs x 145 per hr)-(5040 hrs x Rs140 per hrs) =Rs 822150-Rs 705600 = Rs 116550 unfavorable

Price variance= (Rs145 per hr-Rs 140 per hr) x 5670 = Rs 5 per hr x 5670 hrs = Rs 28350 Efficiency variance = (5670 hrs-5040hrs) x Rs 140 per hrs = Rs 630 x Rs 140 per hrs =Rs 88200 (Unfavorable)