Mcs.docx

Q.25 Techniques/ Quantitative techniques used for Budgeted preparation Ans. Although mathematics techniques and computer improve the budgetary process, they do not solve the critical problem of budgetary control. The critical problems in budgeting used to be in the behavioural area Simulation Simulation is a method that constructs a model of a real situation and then manipulates this model in such a way as to draw some conclusion about the real situation. The preparation and review of a budget is a simulation process. With a computer simulation, senior management can ask what the effect of different types of changes would be receive almost instantaneous answers. This gives senior management a chance to participate more fully in the budgetary process. Several computer software packages are available. Some are specific to certain industries, others are general process. Most require adaptation to the company’s own way of doing things and this process may requires a year, or several years of intensive efforts on the part of the company employees or consultants. In some cases the resulting program has proved to be more complicated than managers will tolerate. If the needs of managers, both budgetees and senior management are properly taken into account, however the resulting program can have great benefits.

Probability Estimates Each number in a budget is a point estimate that is, it is the single “most likely” amount. For example, sales estimates are stated in terms of the specific number of units of each types of product to be sold. Point estimates are necessary for control purposes. For planning purposes however a range of outcomes may be more helpful. After a budget has been tentatively approved it may be possible

with a computer model to substitute a probability distribution for each major estimate. The model then is run a number of times and a probability distribution of the expected profits can be calculated and used for planning purposes. This is called a Monte carlo Process. Some authors have proposed that budgets be prepared initially using probability distribution instead of point estimates that is the budget committee would approve a number of probability distribution rather than specific amounts. Subsequent variance analysis would be considerable, however also if the procedure is to ask for three numbers pessimistic, most likely and optimistic the result is likely to be normal curve with an expected value equal to the most likely number. This is no better than estimating the most likely number in the first instance except that, theoretically a measure of dispersion is reported. In any event probabilities budgets are rarely found in practice.

Q.26 Types Of Variances Ans: Variances are hierarchal. They begin with the total business unit performance, which is divided into revenue variance and expense variance. Revenue variance are further divided into volume and price variance for the total business unit and for each marketing responsibility centre within the unit. They can be further divided into sales area and sales district. Expense variance can be divided between manufacturing expenses and other expenses. Manufacturing expenses can be further subdivided by factories and departments within factories. Therefore it is possible to identify each variances with the individual manager who is responsible for it. This type of analysis is a powerful tool without which the efficacy of budgets would be limited.

Total Variance

NonManufacturing Cost

Administration

Marketing

Manufacturing Cost

R&D

Variable Cost

Fixed Cost

Material

Direct Labour

Variable Overhead

Sales

Volume

Market Share

Selling Price

Industry Volume

The profit budget has embedded in it certain expectations about the state company’s market share, its selling price and its cost structure. Results from variances computation are more actionable of changes in actual results are

analysed against each of these expectations. The analytical frame work we use to conduct variances analysis incorporate the following ideas:

 Identify the key causal Factors that affect profit.  Break down the overall profit variances by these key causal factors.  Focus on the profit impact of variances in each casual factors.  Try to calculate the specific, separable impact of each casual factor by varying only the factor while holding all other factors constant.  Add complexity sequentially, one layer at a time, beginning at a very basic common sense level.  Stop the process when the added complexity at a newly created level is not justified by added useful insights into causal factors underlying the overall profit variances

Revenue Variances The calculation is made for each product line, and the product line results are then aggregated to calculate the total variances. A positive variance is favourable, because it indicates that actual profit exceeded budgeted profit and a negative variance is unfavourable. Selling price variance The selling price variable is calculated by multiplying the difference between the actual price and the standard price by the actual volume. Mix and Volume Variances The equation for the combined mix and volume variance is:

Mix and Volume Variance = (Actual Volume – Budgeted Volume) + Budgeted unit Contribution. Mix Variance Mix Variance = [(Actual volume of sales) – (Total actual volume of sales – Budgeted proportion) * Budgeted unit contribution] Volume Variance

The volume variance is calculated by subtracting the mix variances from the combined mix and volume variance Volume Variance= [(Total actual volume of sales) * (Budgeted percentage) – (Budgeted sales)] * (Budgeted unit contribution)

Market penetration and Industry volume One extension of revenue analysis is to separate the mix and volume variance into the amount caused by differences in market share and the amount caused by differences market share and the amount caused by differences in industry volume. The principle is that the business unit managers are responsible for market share but they are responsible for the industry volume because that is largely influenced by the state of the economy. The following equation is used to separate the effect of market penetration from the industry volume on the mix and volume variance: Market share variances = [(Actual sales) – (Industry volume)] * budgeted market penetration * budgeted unit contribution. Industry Volume variance = (Actual industry volume – Budgeted industry volume) * Budgeted market penetration * Budgeted unit Contribution

Expense Variance Fixed Costs Variances between actual and budgeted fixed costs are obtained simply by subtraction since these costs are not affected by either the volume of sales or the volume of production Variable Costs Variable cost are the cost that vary directly and proportionate with volume. The budgeted variable manufacturing costs must be adjusted to the volume of production.