The implementation of the strategic plan of any organization always commences by determining the basic expectations of the management. These prospects often revolve around the future technological, economic, and competitive conditions of the business as well as their anticipated short-term and long-term effects. It is against this backdrop that many managers are keen on conducting situational analyses that entail examining both the strengths and weaknesses as well as opportunities and threats that competitors impose it is only after performing a SWOT analysis that an organization can accurately identify the potential strategies that it can leverage on to achieve its goals (Karim, 2019). The development of a budget is a significant step that a company uses to initiate its strategic plan.
An organization manager relies on responsibility centers drawn from their organizational structures for accountability. There are four known responsibility centers in an organization upon which decisions are made; cost center, revenue center, profit center, and investment center (Yagudina et al., 2017). An organization will manage to attain its strategic goals through an efficient budgeting system, which will, in turn, allow the manager to control key activities such as financing, revenue, and expenses.
However, to develop an effective budget that will inform key decision-making processes of the company, the manager has the option of applying various hypothetical figures. These data are drawn from the relationship between the actual cost and the standard cost. The actual cost (AQ) refers to the ‘actual quantity of input applied in the production of output while the standard price (SP) and standard cost (SQ) are the ‘standard’ price and quantity that the manager had anticipated.
Each productive input factor contains the variance analyses of labor, overhead, and material. Variance means the balance between the incurred actual cost and the standard cost appropriated for the production to be achieved. These hypothetical figures are significant for decision-making. By using the material price variance, a manager can expose the difference that exists between the materials purchased standard price and the actual amount paid for the very materials.
When it comes to determining the variance in materials quantity, the manager will compare his company’s standard quantity of materials that ought to have been used to the quantity of materials that have been used. Thus, this underscores the significance of standard material quantity and actual material quantity variances in budgeting for decision making (Mubashar & Tariq, 2019). The manager will then measure this as the standard price per unit.
The variances of direct labor use similar logic as the direct material one. In determining the direct labor total variance, the manager will be obligated to compare the actual cost of labor to the cost of standard direct labor. The resulting labor variance could accrue from paying laborers rates that are either equal, below, or above the standard rates. It can also be a product of having the laborers work for the reduced amount of time than anticipated.
Therefore, a manager will rely on the labor rate variance to tell the difference between the actual rate and the standard rate for the actual number of hours that the laborers have worked. Decision-making regarding labor cannot be complete without considering the labor efficiency variance (Sekhar & Rajagopalan, 2012). With this, the manager will manage to effectively compare the direct labor’s standard hours that ought to have been used to the real hours that the laborers used. These figures are very significant when it comes to budgeting.
Decision-making involving actual profits from budgets can be achieved by company managers through comparative analysis of variations. It is not the sole responsibility of a company’s CEO or general manager to drive up profits or incur losses for the organization. A unit head is just part of the team that comprises various employees, each of whom must play his or her roles effectively under the stewardship of a manager (Sekhar & Rajagopalan, 2012). Nonetheless, it is the responsibility of a unit manager to study the variances and establish if they are favorable or unfavorable towards sales, revenue, and production.
From a budget, a manager can comfortably tell which expenses are at par, less, or more than anticipated. This information is crucial for it informs whether to bar or increase production and act on sales accordingly. Besides, this information will also empower the manager with the right tools for determining which areas of responsibility need to be aligned further. Additionally, from a budget, a manager will get to pick some key factors that deviate it from the norm and isolate responsibility center variances. For instance, such budget items as revenue, salaries, marketing, maintenance, depreciation, and administration have their respective responsibilities.
In a mining firm, if the manager notices an adjustment in revenue from the budget, then he will know that there is something to do with the quality of the minerals, which affects sales. Therefore, the manager must contact his quality maintenance manager, civil engineer, geologist, marketing, and sales manager to find out where the problem is.
Budget deviation is primarily caused by changes in sales volume and production. A manager is, thus, fully aware that sales and production are key drivers that affect costs and revenue. This calls for the manager to budgets for various production levels. Such budgets are known as flexible budgets and are instrumental in helping a company manager to make effective decisions that will drive production and sales.
References
Karim, K. E. (2019). Advances in accounting behavioral research 21 / edited by Khondkar E. Karim (University of Massachusetts, Lowell, USA). Bingley Emerald Publishing.
Mubashar, A., & Tariq, Y. B. (2019). Capital budgeting decision-making practices: Evidence from Pakistan. Journal of Advances in Management Research, 16(2), 142-167. Web.
Sekhar, R. C., & Rajagopalan, A. V. (2012). Management accounting. New Delhi Oxford University Press.
Yagudina, R. I., Kulikov, A. U., Serpik, V. G., & Ugrekhelidze, D. T. (2017). Concept of combining cost-effectiveness analysis and budget impact analysis in health care decision-making. Value in Health Regional Issues, 13, 61-66. Web.