Budget and Budgetary Control

1. Budgetary Control and Master Budgets

Budgetary control involves establishing budgets, recording actual performance, and analyzing differences (variances) to guide management.

• Master Budget: A comprehensive financial plan consolidating all sub-budgets (sales, production, purchase) to project future cash flows, balance sheets, and income statements.

2. Flexible Budgets vs. Fixed Budgets

• Fixed Budget: Prepared for a single, specific level of activity (e.g., projecting costs for exactly 80% production capacity).
• Flexible Budget: Designed to adapt and project expenses across multiple levels of activity (e.g., 60%, 80%, and 100% capacity) to handle demand fluctuations.

3. Direct Cost Variances

Determines why actual costs differ from standard budgets:

• Material Price Variance = $( ext{Standard Price} - ext{Actual Price}) imes ext{Actual Quantity}$
• Labor Rate Variance = $( ext{Standard Rate} - ext{Actual Rate}) imes ext{Actual Hours Worked}$