1.3. Objetivo y resultados esperados
2.1.1. Marco conceptual de auditoría integral y los servicios de aseguramiento
2.1.1.10. Auditoria Integral
The C1MA defines a flexible budget as "a budget which is designed to change in accordance with the level of activity attained". A flexible budget recognises the existence of fixed, variable and semi-variable costs, and it is designed to change in relation to the actual volume of output or level of activity in a period. The principles underlying the flexible budget are:
(i) to prepare 'contingency plans' in advance. Flexible budgets are prepared for a range of activity rather than for a single level of activity (although the most probable activity level becomes unavoidable/desirable during the course of the year, management automatically adapts itself to the change by switching to a more appropriate flexible budget as the new budget master plan;
(ii) budgetary control. Flexible budgeting is fundamental to budgetary control.
Control is not achieveable with a fixed budget. In fixed budgets control, the budgets prepared are based on one level of output, a level which has been carefully planned to equate sales and production at the most profitable rate. If the level of output actually achieved differs considerably from that budgeted, large variances will arise. Basically the idea of a flexible budget is that there shall be some standard of expenditure from varying levels of output.
The concept of flexible budget was to focus on how control could be achieved over the operations. In a flexible budget, overheads are analysed into three, namely:
(a) fixed;
(b) variable; and (c) semi variable.
ILLUSTRATION
Sales director of Tayo Box Fabricators has become aware of the disadvantages of static budget. The director asks you as the Management Accountant to prepare a flexible budget for October 2005 for its main brand of boxes. The following data are available for the actual operation in September 2005:
Boxes produced and sold 4,500 units
Direct Materials costs N180,000
Direct Manufacturing Labour Costs N135,000 Depreciation and other fixed
Manufacturing costs N101,400
Average selling price per box N 140
Fixed marketing costs N 62,700
Assume no stock of boxes at the beginning or end of the period. A 10% increase in the selling price is expected in October. The only variable marketing cost is a commission of N0.50k per unit paid to the manufacturer’s representatives, who bear all their own costs of traveling, entertaining customers, etc. A patent royalty of N2 per box manufactured is paid to an independent design firm. Salary increases that will become effective in October are N12,000 per year for the production supervisor and N15,000 per year for Sales Manager. A 10% increase in direct materials prices is expected to become effective in October. No changes are expected in direct manufacturing labour wage rates or in the productivity of the direct manufacturing labour personnel standard
costs for any of its inputs.
You are required to:
Prepare a flexible budget for October 2005 showing budgeted amounts at each of these output levels of boxes, 4,000 units, 5,000 units and 6,000 units.
SUGGESTED SOLUTION
TAYO BOX FABRICATIONS LIMITED
FLEXIBLE BUDGET FOR THE MONTH OF OCTOBER, 2006 Activity Level 4,000 units
N
5,000 units N
6,000 units N
Sales Less
Direct material cost Direct labour cost Marketing variable Royalties
Variable costs Contribution Less: Fixed Costs NET PROFIT
616,000 (176,000) (120,000) (2,000) (8,000) (306,000) 310,000 (266,350) 43,650
770,000 (220,000) (150,000) (2,500) (10,000) (382,500) 387,500 (266,350) 121,150
924,000 (264,000) (180,000) (3,000) (12,000) (459,000) 465,000 (266,350) 198,650
WORKINGS
STATEMENT OF COST
SEPTEMBER OCTOBER
N N
Direct material cost 40.00 44.00 Direct labour cost 30.00 30.00 Marketing variable cost 0.50 0.50
Royalties 2.00 2.00
Total variable cost 72.50 76.50
Fixed Cost-Depreciation 101,400 101,400
Marketing 162,700 162,700
Increase in salary – production - 1,000 Increase in salary – marketing - 1,250
264,100 266,350
Selling Price 140 154 3.5.2 Zero-based budget (ZBB) or "priority based budgeting"
ZBB is a budgeting technique which seeks to eliminate the draw backs of traditional incremental budgeting by taking the budgets for service or overhead centres back to a minimal operating level and then requiring increments above this level to be quantified and justified. 'A method of budgeting which requires each cost element to be specifically justified, as though, the budget related were being undertaken for the first time, without approval, the budget allowance is zero" CIMA
ZBB was introduced in the early 1970s in the United States by O. Phyrr. It gained prominence because of the fact that it is based on common sense. President Carter, the President of the United States, directed all US government departments to adopt this technique. ZBB is concerned with the evaluation of the costs and benefits of alternatives and, implicit in the technique, is the concept of opportunity cost. ZBB is applied in three stages
(i) The decision unit: This means subdividing the organisation to discrete sub-units where operations can be meaningfully and individually identified and evaluated.
(ii) The decision packages: Each decision unit manager submits no less than three budget packages namely (a) the lowest level of expenditure, (b) the expenditure required to maintain levels of activity. (c) the expenditure required to provide an additional level of service or activity.
(iii) Agreed packages will form the budget.
Advantages of ZBB
(i) Results in a more efficient allocation of resources to activities and departments.
(ii) It focuses attention on value for money
(iii) ZBB develops a questioning attitude which enables management to determine inefficiency.
(iv) It may lead to cost reduction.
(v) Managers performance can be monitored.
Disadvantages of ZBB
(i) ZBB is a time consuming process and generates volume of paperwork especially for the decision packages.
(ii)
It requires management skill in both drawing decision packages and for the ranking process.(iii) It encourages the wrong impression that all decisions have to be made in the budget.
(iv) Trade Union always go against ZBB, who prefer status quo to remain.
(v) Co-ordination of all activities may be difficult.