Introduction
A Proposal is basically a statement of purpose that is presented for someone’s acceptance. Its key idea is to persuade the person to fund your project.
A proposal needs to be effective in order to emphasize what is required and make the reader interested in the project. The budget is one of the vital elements in a proposal. It is a plan of the estimated finance that would be required, in the form of funds, for the project. Often company heads or other people that are concerned with the proposal tend to see the budget element of the proposal before the rest of the sections. The proposal has the following key elements, firstly, the cover page then an abstract which would encapsulate the entire proposal in a page or two. Then, the introduction and the problem statement will be given. After this, the methodology will be discussed, which are the steps that would be followed in order to achieve the aims and objectives. Next, the budget would be shown followed by a budget narrative which would give an explanation of how the budgeted figures were derived. Then the evaluation method would be stated and finally the conclusion and Appendices.
In this paper, one of the major types of budgets would be described in detail along with its comparison to the principles of design.
Discussion
A budget is a plan for the future. It is an important component of a proposal as it represents a financial picture of the project. Different budget elements are therefore planning tools. Budgeting is important because it gives an idea of the future outflows and inflows of finance. The budget element that is chosen for discussion is the flexible budget.
A flexible budget is the most common and convenient form of budgeting. It is considered a performance evaluation tool. A flexible budget is based on different levels of activity. It is very useful for the comparison of the actual cost of output with the budgeted cost of the same level of output that was forecasted. It is developed using budgeted revenues or cost amounts based on the level of output actually achieved in the budget period. Through flexible budgeting, the variances between the actual cost and the budgeted costs can be adjusted.
Variance is basically the difference between the budgeted amount and the actual amount of sales. This variance can be computed for costs as well as revenues. Variance can be of two types, favorable variance, which is when the actual operating profit is more than the budgeted amount and unfavorable variance which is when actual is relatively lower than the budgeted amount. Budget variance can incur for a number of reasons such as the economic conditions may have changed which affect the demand, level of supplies, cost of material, etc, other than that manager’s job performance may have been very good or very bad. Also, there is a possibility that there may be a mistake during the budget preparation that causes a budget variance.
A flexible budget is normally compared with a fixed or static budget. A static budget deals with only one level of activity. It is based on the level of output that is panned at the start of the budget period. This level cannot be altered later on. In contrast to this, a flexible budget is developed using budgeted revenues or cost amounts based on the level of output actually achieved in the budget period. The flexible budget shows what costs should be as a function of the level of activity. In simple words, the flexible budget provides a better benchmark or technique of comparing and evaluating the performance as it takes into consideration that some costs should be different from the amounts budgeted at the beginning of the year because the level of activity is different from the expected level. (Shim and Siegel, 2008)
When speaking of reports. The flexible budget performance report compares the costs to the actual cost that should have been taking into account the actual level of activity. There are two types of cost variable costs and fixed costs. For the flexible budget to function as it does, it alters the variable costs of the budget according to the output or the level of activity. Fixed costs are not adjusted as they are always supposed to remain fixed.
Management of exception is the practice used in concentrating on those areas that are not performing as planned and ignoring (for the time being) those that are operating normally. This approach requires that only the amount that is large enough to impact decision-making is investigated. Variances that are exceptionally high or exceptionally low are investigated for reasons. (Kemp and Dunbar, 2003)
The steps in developing a flexible budget are, firstly, identifying the actual quantity of output, then calculating the budget for the revenues that are based on the budgeted selling price and the present level of output. And lastly, calculate the budget costs based on budgeted variable costs per output unit, actual output and budgeted fixed cost. Figuratively, it has columns for the actual and budgeted amounts and the differences or variances between these amounts.
Conclusion
Budgets are used by nearly everyone at some point, however, a company’s budget is more involved. A budget report shows variance but it doesn’t state any reasons for it. It shows the management that there is some deviation between the budgeted and the actual figures. The budget variance tells the manager that there were some sales or expenses whose amounts weren’t what had been expected and therefore they can take some action on it. A flexible budget is an element of the budgeting tools. It is considered more practical and useful than fixed/static budget as it gives the figures in comparison to the actual output or activity of the given time period thus the evaluation process becomes a lot easier.
References
Shim, J, & Seigel, J (2008). Budgeting basics and beyond. Wiley.
CliffsNotes.com. Flexible Budgets. 2008. Web.
Kemp, S, & Dunbar, E (2003). Budgeting for managers. McGraw-Hill.