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The advantages and disadvantages of budget setting

Direct costs, indirect costs and overhead:

Direct costs: those cost that can be directly tracked to producing specific goods or services. For instance, the cost of leather in making carriers can be attributed right to the cost of manufacturing the products. Depreciation and administrative expenses, are more challenging to assign to specific products, and so are not considered as direct costs.

Indirect costs: those costs that not directly related to the development of a specific good or service but that is indirectly related to a number of goods or services. Purchasing business furniture for bag creation firm is one example of indirect cost because it does not influence the production of anybody unit.

A cost can be direct cost of a team but it is indirect cost of others. The classification will depend on which department the cost is involved in. For example, the salary of personnel working in engineering site is a direct cost however the salary of managers managing this site is not immediate cost, it is indirect cost.

Overheads: in business, overhead expense identifies an ongoing price of operating an enterprise. All costs on the income declaration are thought to be overhead charge except immediate materials and immediate labor expense. For instance, depreciation charge, advertising, insurance, rental fees, telephone expenses, repairs, office equipment and utilities costs are overheads.

c. Controllable and uncontrollable costs:

- Controllable costs: costs that may be influenced by the office involved or professionals can handle managing them.

- Uncontrollable costs: costs that professionals cannot influence significantly or professionals cannot control them.

2. Measure the declaration of the delegate

In my perspective, the delegate misconceived the conditions used in the declaration, so because of this I strongly disagree with this declaration.

Costs are given to cost things for a number of purpose including costs, profitability studies and control of spending. Based on the goal of management, the expenses are the following:

For cost amount profit research or profitability studies, costs are divided into three categories fixed cost, adjustable cost and semi-variable cost.

For costs, costs are grouped into immediate costs and indirect costs.

For control of spending, costs are divided into controllable costs and uncontrollable costs.

Because of the misconception about classification of cost, the delegate used the terms in this statement wrongly.

Direct costs can be regarded as both fixed costs and variable costs.

As I have mentioned through the apparent example above, immediate costs like the salary of staff working in structure site is a set cost. On a monthly basis, the company has to pay the fixed rate salary for the personnel based on the colored labor deals they may have made. On the other hand, most of variable costs such as direct input materials, immediate labor per device are direct costs.

Indirect costs can be either set costs or changing costs.

In comparison with direct costs, almost all of indirect costs are fixed costs, including the local rental fees for representative office buildings, sale division and the security cost. These costs do not directly attribute to processing products thus they can be indirect and set costs. On the other hand, labor costs can be indirect as in case there is maintenance employees or executive officials.

Controllable and uncontrollable costs:

For control of spending purpose I have mentioned above, costs are classified into controllable and uncontrollable costs that stand for the amount of management in a term.

When you have expert to choose the suggestions materials, the techniques and staffs, the collection can be thought to be controllable costs. If you made a multi-year arrangement to long term contract for collection at set year fees, the cost can be uncontrollable. In lower management levels, the administrator doesn't have enough leading skills so with any kind of costs the manager cannot control which becomes uncontrollable cost. In in contrast, in the bigger management level, both fixed costs and varying costs can be under governed.


1. Participation in budget setting

Participative budgeting is the problem in which budget are designed and established after insight from subordinate professionals, instead of merely being imposed. The purpose of involvement in budget environment is to split responsibility to subordinate managers and set a form of personal possession on the final budget. The budgeting way where the subordinate participates in budget environment, they provide their own information that the supervisors use to formulate the home - enforced budget or participative budget (Chapman, Hopwood & Shields, 2006). Firm performance is expected to be well upgraded by which makes it easy for the supervisor to allocate the resources better. Based on the information provided by the subordinate, the right resources-allocation decisions are making, the participative budgeting will increase the company performance.

Participation in budget setting up has its attractive effects on a business performance these include the transference of information from subordinate to superior so that it can increase subordinate's job satisfaction. In addition, its advantages contain budgetary responsibility and higher determination to attain the goals. Aside from the desirable results, participative budgeting has its unwanted effects included in these are frustrating, padding the budget. However, the condition which decides the success of a participative budget depends upon various factors such as job related information, the level of participation, the amount of subordinate effect and difficulty of budget.

a. Advantages

Transferring information from subordinate to superior is one of the participative budget setting up advantages. Subordinates have opportunities to get hold of right to the superior and discuss organizational problems with the superior so that they can exchange the info and ideas can solve the issues and unite future point of views. The transferal of information is particularly important when high difficult task is being deal with, the more challenging the duty is, the higher the necessity for subordinate's discussion. In addition, when people participate in arranging a budget, they may be recognized as associates of a team, they share budgetary responsibility and drive is higher when they mutually attain their own goals rather than the goals are imposed.

b. Disadvantages

Besides the desirable results, participative budgeting has its unwanted effects for a business. Time consuming is the biggest disadvantage of participation in budget setting. Vacillation and wait can be produced when way too many meetings are maintain. Budgetary slack is another unwanted effect, happens because of overestimation of expense that can foster budgetary "gambling" through budgetary slack. Unless incentives to accurate tasks are provided, padding the budget can be severe.

2. Variances

A variance is the difference between organized, budget or standard cost and actual cost, and similarly for revenue. The full total budget is the difference between your real cost of the insight and its organized cost.

Total variance = (AP x AQ) - (SP x SQ)

Where AP is the genuine price per product of the input

AQ is the genuine quantity of insight used

SP is the standard unit price

SQ is the typical quantity

Price variance is the difference between the genuine and standard device price of the source multiplied by the amount of inputs used (AP - SP) x AQ.

Usage variance is the difference between the real and standard level of inputs multiplied by the standard device price of the insight (AQ - SQ) x SP

Total variance = Price variance + Utilization variance

= (AP - SP) x AQ + (AQ - SQ) x SP

= (AP x AQ) - (SP x SQ)

When actual prices or utilization of inputs are greater than standard prices or consumption, unfavorable variance will take place. When other occurs, it will lead to advantageous variance. Variance always is accessible unless the project plan is properly carried out. Both unfavorable and beneficial variances are not equivalent to good and bad variances. Normally, whether variances are good or bad depends upon why they occurred. Significant variances inform management that something must be examined.

In truth, it is uncommon when creation performance is exactly the same as the established requirements and it will not be likely. Random variant around the typical are expected. To be able to offer with a deviation between plan and real, for each company, the managers should establish a satisfactory selection of performance. The satisfactory range is the specifications of allowable deviation. Whenever a variance occurs, if it is in this range, it is assumed to be brought on by random factors. If a variance occurs outside this range, the deviation may very well be triggered by non-random factors. Non-random factors include both of controllable and uncontrollable situations. Inside the non-controllable case, professionals need to revise the criteria. Based on experiences from history, intuition and judgment, professionals determine the allowable deviation from expectations.

Question 3

1. Describing the conditions used

a. Committed set costs

Fixed costs are costs that continue to be constant, in total, regardless of changes in the level of activities. Regardless of the activity levels increase or reduce, the fixed costs remain the same, in total, if other exterior factors like price changes do not happen. However, fixed costs will be changed on per device basis. Predetermined costs may very well be being committed for preceding decision or deal. Within the other words dedicated fixed costs are costs that relate with the investment in facilities, equipment as well as depreciation and the basic organizational structure of a firm. In addition, agreement for recruiting employees such as the salaries of managers and supervisors are also devoted fixed costs.

b. Uneven income flows

Uneven revenue moves indicate the problem that a company has to package with when customers show their high or low demand for products that your company provides. Actually, unequal revenue moves can be predictable and depend on the time frame in a season. Travel agents and hotels are typical of unequal revenue flows because tourists are merely occasional customers. It is evident that in the summer a travel company has the biggest amount of customers than other reasons. Also, a swim suit shop has higher level of demand in the summertime and there is hardly demand in the wintertime or spring and coil.

2. Implication of the above mentioned situation for the company

An exec has asserted that lots of costs of these costs are dedicated fixed costs then chances are to have a high break - even point. This means that before getting income, the company has to operate at advanced but when it cross the break in the action - even point its profit will raise speedily because of the increase in revenue leading to a high P/V ratio.

There are 2 ways to raise profit, one is increase income and a different one is decrease costs. In a nutshell period of time, profit will never be much affected by these committed resolved costs. Therefore, in stead of adjusting the expenses, the exec should onward to revenue part of business. Revenue will be taken care of at affordable level if the earnings is achieved above the break-even level.

Focusing on getting revenue, particularly through the times of low level of demand, the company should capitalize all the opportunities. Going for a flexible approach, the business supplies the price of the merchandise or services to suit the situation of the business and the purchase price the customers acknowledge or willing to pay. When the company operates below the break - even level, it can acknowledge any price greater than variable cost.

Unlike creation industry, leisure or tourism industry products can not be stored. Normally, in processing industry in low level of demand time, they can manufacture products for stock and doesn't need to be versatile. For instance, a textile winter company whose main products are pullovers, woolen scarves, gloves etc. Actually, these products are provided to consumers in winter, summer time is the reduced demanded season. Therefore, in summer the company would not concentrate on sales strategy but developing strategy to produce more products gratifying winter demand.

A flexible approach to pricing means performing a costs strategy to be able to attract just as much customers as it can be when the market demand for products that the business provides is low. The purchase price increase in high-season or occupied period. In this time around, the company needs to operate with full capacity. For example, in summertime, people often go for going, demand for booking rooms increase, which means hotel room prices are usually higher. Hotels have to operate their full capacities to server travellers and guests. Whereas in winter or spring when the amount of tourists and guests is significantly lower, hotels will offer the new cheap or provide full package holiday break with the promotion.

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