Accounting for Decision Making - Variance Report, Flexible Budget and Sales, Material, and Labour Va

Running head: ACCOUNTING FOR DECISION MAKING ACCOUNTING FOR DECISION MAKING Name of Student Name of University Author notes 2 ACCOUNTING FOR DECISION MAKING T a ble of Contents Answe r to q ue stio n 2 ................................ ................................ ................................ .................. 3 Re fe re nces ................................ ................................ ................................ ................................ .. 7 3 ACCOUNTING FOR DECISION MAKING Answe r to que stion 2 a) From the above variance report, it is evident that operating income is favourab le for the organisatio n, which denotes that the organisatio n will provide incentives to its manager and therefore she will be very excited to work with the organisatio n. She will be very motiva te d from the incentives received from the firm and will be very excited to perform effic ie n t ly. Providing incentive to the manager will allow her to understand that the organisatio n value s them and therefore she will be more focused to achieve t he goals and objectives for the organisatio n (Ozdil & Hoque, 2017). Further, once the manager is recognised, she will be more than happy to enthusiastica lly work towards the organisatio n and allow it to achieve its future goals effic ie ntly. Further, incent ive s will allow the firm to improve the current productivity as well as will allow it to achieve a healthie r workplace atmosphere. b) Static Fle xible Actual Static B udget Variance Fle xible Budget Variance B udge t B udge t in $ in % in $ in % Sale s Volume 10,000 12,000 12,000 2,000 20.0 % F 0 0.0% F Sales $1,500,0 00 $1,800,0 00 $1,750,0 00 $250,0 00 16.7 % F - $50,00 0 -2.8% U 4 ACCOUNTING FOR DECISION MAKING Materials - $500,000 - $600,000 - $575,000 - $75,00 0 15.0 % U $25,00 0 -4.2% F Labour - $300,000 - $360,000 - $310,000 - $10,00 0 3.3% U $50,00 0 - 13.9% F Fixed Production Overhead - $240,000 - $240,000 - $240,000 $0 0.0% F $0 0.0% F Variable Production Overhead - $160,000 - $192,000 - $260,000 - $100,0 00 62.5 % U - $68,00 0 35.4% U Fixed SG&A Costs -$50,000 -$50,000 -$50,000 $0 0.0% F $0 0.0% F Variable SG&A Costs -$50,000 -$60,000 -$50,000 $0 0.0% F $10,00 0 - 16.7% F Ope rating Income $200,000 $298,000 $265,000 $65,00 0 32.5 % F - $33,00 0 - 11.1 % U From the above flexib le budget variance, it is evident that despite of the favoura b le variance in the initia l report, the operating income from the flexib le budget is not sho wing favourable results for the firm. The operating income is estimated at -$33,000 which is -11.1% of variance of the operating income. Therefore, the curre nt operating income of the organisatio n will be unfavourab le for the organisatio n. During the unfavo urab le work condition, the organisatio n can focus on cutting the compensatio n of the manager and the employees which can further impact on the behaviour of the individ ua ls (Yao, Li & Yun, 2022). Further, it has been also found that negative operating income can affect the long term financ ia l health of the organisatio n therefore the organisatio n will have to focus on improving the operating income in the comin g years. The negative amount of operating income can significa ntly impact the revenue growth of the firm significa ntly therefore the firm will have to focus on cross selling its products which will aid towards the long term profitability (Za mfir etal., 202 1). Further, it can be also noted that reducing the cost of goods sold can be a very effective option to improve the current state of operating income for the organisat io n. Improving the current state of financ ia l statement audit can allow the business to reduce fraud s within the organisatio n thereby improving the operating profit of the organisatio n. 5 ACCOUNTING FOR DECISION MAKING c) Sales Variance: Amount Amount Actual Sales Price p.u. $145.83 Standard Sales Price p.u. -$150.00 Price variance pe r unit -$4.17 Actual Quantity Sold 12,000 Sale s Price Variance -$50,000 U Actual Quantity Sold 12,000 Standard Sales Volume -10,000 Volume Variance in units 2,000 Standard Sales Price p.u. $150.00 Sale s Volume Variance $300,000 F Sale s Variance $250,000 F The above sales variance denotes that the results are favourable for the firm. The volume variance in units are estimated at 2000 units and the sales variance is estimated at $250,000. The sales price variance is -$50,000, which is not favourable for the business at all. Material Variance: Amount Amount Actual Material Cost p.u. $50.00 Standard Material Cost p.u. -$50.00 Cos t variance per unit $0.00 Actual Material Used 11,500 M ate rial Cos t Variance $0 F Actual Material Used 11,500 Standard Material Usage -12,000 Us age Variance in units -500 Standard Material Cost p.u. $50.00 M ate rial Us age Variance -$25,000 F M ate rial Variance -$25,000 F The results derived from the above section also makes it evident that the mate ria l variance it favourable for the firm. The materia l cost variance is estimated at $0 which is favourable however the overall material variance is not favourab le for the firm w hich can impact the materia l cost of the organisatio n negative ly. 6 ACCOUNTING FOR DECISION MAKING Labour Variance: Amount Amount Actual Labour Rate per hour $40.00 Standard Labour Rate per hour -$30.00 Rate variance pe r hour $10.00 Actual Labour Hours 7,750 Labour Rate Variance $77,500 U Actual Labour Hours 7,750 Standard Labour Hours -12,000 Efficie ncy Variance in hours -4,250 Standard Labour Rate per hour $30.00 Labour Efficie ncy Variance -$127,500 F Labour Variance -$50,000 F The labour variance shows that the firm will have favourab le result. However, the labour rate variance remains unfavourab le for the firm, which can affect its long -te rm operability. d) As per the accounting theory, the preparation of flexib le budget is not d iffic ult since it can change with the change in variable cost and the fixed cost will remain the same. Howeve r, an organisatio n can struggle to meet its organisatio na l goals if it realises that there are no variable cost or if the fixed cost remains too hi gh for the firm. Calculating the variable cost with adherence to the accounting principa l can be appropriate in this case since the fixed cost and the variable cost are both present in the case (Fleischma n & McLean, 2020). The underlying accounting princip a l related to the flexib le budget denotes that for any volume of business, there must be some type of expenditures and some guidelines to determine the actua l principa l. Since the business environme nt is dynamic and changing, the principa l in this case can be applied and accepted. 7 ACCOUNTING FOR DECISION MAKING Re fe re nce s Fleischma n, R., & McLean, T. (2020). Manageme nt accounting: Theory and practice. In The Routledge companion to accounting history (pp. 214 -251). Routledge. Ozdil, E., & Hoque, Z. (2017). Budgetary change at a universit y: A narrative inquiry. The British Accounting Review, 49(3), 316 -328. Yao, Y., Li, J., & Yun, L. (2022). Applicatio n of Flexible Budget Based on Company Profit Model: Taking VK's Financia l Data as an Example. Asian Business Research, 7(2), 88. Zamfir, M., Ionescu, C. A., Nicolau, N. L. G., Stanescu, S. G., Paschia, L., Coman, M. D., & Bugnariu, A. D. (2021). Flexible Budget: Management Method for Cost Control and Monitoring the Performance of Economic Entities. In CSR and Manage me nt Accounting Challenges i n a Time of Global Crises (pp. 128 -155). IGI Global.