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A budget is an analytical tool in any organization that gives a true reflection of the revenues and expenses. It is a comparative tool which lays the basis for forecasting. Variable costing is a common tool in cost management. It is a true reflection of the real economic situation. The management accountants find it relevant to use a variable cost approach because it separates variable and non variable costs. A budget is a planning tool which also aids the institution to project into future income (Foster, 2010). The current data in the company provides the expected expenses. This will aid in the calculation of the company profits.
The question involves the identification of the budget. This is a flexible budget. A flexible budget does comparison using different units. On the other hand, a fixed budget uses a non variable number of units of production. The production unit in this case is the number of students’ enrolment in the charter school. This is a three level budget. It reflects students in three categories. That is 120, 100 and 66. The nature of classification of revenues and expenses shows flexibility in the budget. A static budget would have used a fixed number of students in the budget planning process.
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This requires one to determine the total revenue per student. This is in exclusion of the grants. The revenue items are general revenue, compensatory revenue, transportation, TRA, food reimbursement and federal title funds.
The summation of the individual items of revenue will add to $ 6063.09 and each student revenue estimate is $60663.09.This is arrived by summing of (3546+1775+170-42.44+246.5+368).The Student revenue for three categories are different. For the first category, the total revenue per student is $6, 688 grants per student add up to $75, 000/120 = 625. The exclusion of grants will lead to an estimate of $6063.
For the 100 students, total revenue per student is $6, 813. The total grants per student are $ 625. The exclusion of grants from the total revenue per student will result to $6, 188.for the third category of students, the total revenue including grants is $7, 199. Subtraction of $625 will lead to an estimate figure of $6574.
This requires the computation of all the expenses. The total expenses for the three categories of students (120, 100, and 66) are as follows; $542, 157, $528, 267, $504, 654.all of the different types of expenses is not necessary. This is because some of the expenses exceed the revenue from the student.
The BEP assumptions
The technique assumes the non changing nature of various items. The unit selling price is assumed to be constant. The unit variable costs are assumed to be constant (David, 2009). The overall costs are also assumed to be constant. The organization sells all of the production units. This means in the analysis production units will be equal to the sold units.
The general benefits of preparing a budget
A budget is advantageous to the company in the following ways;
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It gives the company ideas on where the company wants to go and the measures that can be undertaken so as to reach there (Wood, 1999).It is a realistic tool for projecting future cash flows for the company, and its past projections would assist to get alternative sources of finance.
This budget also gives an overall business budget of the company. It reveals the earnings and expenses of the company as a whole showing whether the business is in a good or bad position.
The budget as a control function
Budgeting is the technique used by the organizations to cut on costs. The control function will reduce and trim off unnecessary expenses. Some of the variable costs in the budget serve to inflate the overall expenses. This includes the trip expenses.
The control function of a budget
Variance analysis was initially done to aid in the control and planning of the functions of the organization. The technique involves classification of costs into direct and indirect costs (Foster, 2010). Sometimes the costs are classified as operational or non operational costs. Thiis is a comparative technique. The actual costs are compared with the standard costs.
Advantages of the variance analysis
The merits of variance analysis exceed the demerits of the variance analysis. The standard costs are key in the cost management exercise. Whenever the costs do not deviate with large margins, the managers will focus of the future issue. The first advantage is variance analysis aid the management to measure the deviation of costs. The degree of deviation is crucial as it aid to predict future managerial issues. The second merit is variance analysis technique is a true measure of efficiency and economic reality facing the organization. It is a yardstick to gauge individual performance within the organization. The third advantage is the promotion in the book keeping tools. This involves the recording of standard costs, as opposed to actual costs. The next advantage is the ability to integrate the standard costs in the responsible accounting systems. This will serve to control actual costs within the organization.
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The disadvantages of variance analysis
The disadvantages of the variance analysis arise from the complexity of the formulae. Sometimes it is not easy to master all the procedures within a short period of time. The standard costs data is not always available. The reports may be relevant within a short period of time. This will make variance analysis inappropriate. The second disadvantage is unfavorable variance will pile pressure on the management. This will demoralize the senior management. The senior management will tend to overemphasize on the negative variance at the expense of positive variance. This will result to inefficiency within the organization. The process tends to assume that the labor costs are always variable. This is fallacious. Some of the labor costs are fixed costs in the organization. Favorable variance can be misleading to the organization. The achievement of standards is the ultimate goal of the management accountants. The focus on the variance trends deviate the true focus on the need to attain optimal productivity in the organization. The organization can have other important priorities. These include client satisfaction.
The organization can complement their analysis using other tools. The tools will include the break even analysis charts and calculations.
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