Master and Flexible BudgetsACC/543January 28, 2013Thomas BenscoterMEMORANDOMDate: January 28, 2012To. Guillermo Furniture CompanyFrom: Ashley Lee, Ebony De La Torre, Janelle Durham, Misha Cross-------------------------------------------------Re: Master and Flexible BudgetsGuillermo Furniture: Master and Flexible BudgetsA master budget can be a communication tool in which the company's employees can perceive how their hard work affects the company's goals. The budget is an outline of a company's plans that sets detailed goals for an organization regarding sales, production, distribution, and financing. This tool can also reveal if employees are meeting their goals set forth by the company ...view middle of the document...
According to Edmonds (2007), "When all costs are fixed, every sales dollar contributes one dollar toward the potential profitability." Once the company sells enough to cover all fixed costs, each additional sale represents pure profit (Edmonds, 2007). Companies with high operating leverage require only a small percent increase in revenues to increase the change in profits. On the other hand, companies with high operating leverage increases risk. If sales volumes decline, costs do not decline.Variable costs in a budget fluctuate based on the number of units produced. Because variable costs fluctuate with volumes, Guillermo budgeted variable costs based on cost per unit. In the master budget, January through March the Mid-Grade option produces a steady 310 units and as a result the amounts of materials, which is a variable cost, remains the same. As of April and June the amount produced under the Mid-Grade option increases and with it does the amount of materials consumed produce the product. In short as the production amount fluctuates so does the amount of the variable costs associated with those products production. In the case of the High-End option, initially the production of these products is of small volume however it gradually increases from eight in January to 22 in February. The impact of this jump is immediately noticeable in the increase of variable costs as it grows from the initial $2,000 to $5,500. The cost increase is directly correlated to the amount of produced.Static and Flexible BudgetA static budget remains the same even if the volume of activity differs from planned volume. A static budget, also called a master budget, is prepared by the beginning of the accounting period. A flexible budget shows the expected costs and revenues at a variety of volume levels. Both budgets use the same variable costs per unit and constant fi...
