Required Explain how a flexible budget can overcome the weakness of a static budget
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Below are data from Peekay Chewing Gum Company’s operating budgets. The company’s financial year ends on 30 June.
|
|
Quarter 1 |
Quarter 2 |
|
Sales |
$248,470 |
$251,539 |
|
Direct material purchases |
120,295 |
128,832 |
|
Direct labor |
76,500 |
74,000 |
|
Manufacturing |
28,000 |
25,400 |
|
Selling and administration expenses |
33,500 |
33,500 |
|
Collection from customers |
230,500 |
220,000 |
|
Cash payments for purchases |
114,000 |
118,000 |
Additional data:
Equipment was sold in July for $9,000 and $5,500 in November. Dividends of $6,500 were paid in August. 20% of the selling and administration expenses relate to
The company has a 15% open line of credit for $70 000 with their bank.
Required
Explain how a flexible budget can overcome the weakness of a static budget
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