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Problems in budgeting
Whilst budgets may be an essential part of any
marketing activity they do have a number of
disadvantages, particularly in perception terms.
Budgets can be seen as pressure devices
imposed by management, thus resulting in:
a) bad labour relations
b) inaccurate record-keeping.
Departmental conflict arises due to:
a) disputes over resource allocation
b) departments blaming each other if targets are
not attained.
It is difficult to reconcile personal/individual
and corporate goals.
Waste may arise as managers adopt the view,
"we had better spend it or we will lose it". This is
often coupled with "empire building" in order to
enhance the prestige of a department.
production requirements
planning stock levels
storage space
trends of material prices.
purchase of stocks
payments of wages or other expenses
purchase of capital items
payment of interest, dividends or taxation.
Cash receipts
Loans received
Cash payments
Payments to creditors
Loan repayments
Month 1
Month 2
Month 3
Capital expenditure
Taxation
Dividends
FINANCIAL BUDGET
consists of:-
consists of
Cash budget
Production budget
Balance sheet
Materials budget
Funds statement
Labour budget
Admin. budget
Stocks budget
f) Other budgets:
These include budgets for:
administration
research and development
selling and distribution expenses
capital expenditures
working capital (debtors and creditors).
19X3
Sales at $20 per unit MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB
260
200 320
270 300 320 350 370 380 340 310 260 250
Cultivation
Irrigation
Field maintenance
Harvesting
Transportation.
1st quarter
2nd quarter
3rd quarter
4th quarter
Labour
Cutting
nil
9,000 tonnes
16,000 tonnes
10,000 tonnes
Sundry
nil
Tractors
nil
630 hours
1,100 hours
700 hours
Cane trailers
nil
9,000 tonnes
16,000 tonnes
10,000 tonnes
nil
9,000 tonnes
16,000 tonnes
10,000 tonnes
Unit cost
1st
quarter
2nd
quarter
3rd
quarter
4th
quarter
Total
Labour
Cutting
$0.75 per
tonne
6,750
12,000
7,500
26,250
Sundry
750
1,125
1,125
3,000
Tractors
4,725
8,250
5,250
18,225
Cane Trailers
$0.15 per
tonne
1,350
2,400
1,500
5,250
2,250
4,000
2,500
8,750
$15,825
$27,775
$17,875
$61,475
Fixed costs
Depreciation
Unit rate
($)
($)
2,000.00
2,000.00
200.00
Driver
Repairs
Maintenance
2,000.00
7,500.00
1,000.00
7.50
Master budget
The master budget for the sugar cane farm may
be as shown in figure 4.5. The budget represents
an overall objective for the farm for the whole
year ahead, expressed in financial terms.
130,000
250,000
120,000
500,000
Less: Costs
Cultivation
37,261
48,268
42,368
55,416
183,313
Irrigation
7,278
15,297
18,473
11,329
52,377
Field maintenance
4,826
12,923
15,991
7,262
41,002
Harvesting
15,825
27,775
17,875
61,475
Transportation
14,100
24,750
15,750
54,600
49,365
106,413
129,357
107,632
392,767
85,800
135,165
112,240
94,260
85,800
135,165
241,578
241,597
201,892
478,567
135,165
112,240
94,260
90,290
90,290
129,338
147,337
111,602
388,277
Gross surplus
66,200
102,663
8,398
111,723
Less: Overheads
5,876
7,361
7,486
5,321
26,044
Net profitless)
(5,876)
(6,699)
95,177
3,077
85,679
3rd quarter
Year to date
Item Harvesting
Actual
Budget
Variance
Actual
Budget
Variance
Labour
- Cutting
12,200
12,000
(200)
19,060
18,750
(310)
- Sundry
742
1,125
383
1,584
1,875
291
Tractors
9,375
8,250
(1,125)
13,500
12,975
(525)
Cane trailers
1,678
2,400
722
2,505
3,750
1,245
4,270
4,000
(270)
6,513
6,250
(263)
28,265
27,775
(490)
43,162
43,600
438
Labour
The difference between actual labour costs and
budgeted or standard labour costs is known as
direct wages variance. This variance may arise
due to a difference in the amount of labour used
or the price per unit of labour, i.e. the wage rate.
The direct wages variance can be split into:
i) Wage rate variance: the wage rate was higher
or lower than budgeted, e.g. using more unskilled
labour, or working overtime at a higher rate.
ii) Labour efficiency variance: arises when the
actual time spent on a particular job is higher or
lower than the standard labour hours specified,
e.g. breakdown of a machine.
Materials
The variance for materials cost could also be split
into price and usage elements:
i) Material price variance: arises when the actual
unit price is greater or lower than budgeted.
Could be due to inflation, discounts, alternative
suppliers etc.
ii) Material quantity variance: arises when the
actual amount of material used is greater or
lower than the amount specified in the budget,
e.g. a budgeted fertiliser at 350 kg per hectare
may be increased or decreased when the actual
fertiliser is applied, giving rise to a usage
variance.
Overheads
Again, overhead variance can be split into:
i) Overhead volume variance: where overheads
are taken into the cost centres, a production
higher or lower than budgeted will cause an overor under-absorption of overheads.
ii) Overhead expenditure variance: where the
actual overhead expenditure is higher or lower
than that budgeted for the level of output
actually produced.
Calculation of price and usage variances
The price and usage variance are calculated as
follows:
Price variance = (budgeted price - actual price) X
actual quantity
Usage variance = (budgeted quantity - actual
quantity) X budgeted price
Now attempt exercise 4.2.
Exercise 4.2 Computation of labour
variances
It was budgeted that it would take 200 man days
at $10.00 per day to complete the task costing
$2,000.00 when the actual cost was $1,875.00,
being 150 man days at $12.50 per day. Calculate:
i) Price variance
ii) Usage variance