Managing Cash Flow

Specific Recommendations 219
figures in Exhibit 6.11 reflect what the budget would have been at the actual level
of units produced.
The preparation of a flexible budget requires the company to know its fixed
and its variable costs, so that the budget numbers can be adjusted appropriately.
Flexible budgeting does not mean a change in the budget—only a change in the
reporting of the budget figures to reflect the company’s actual activity level (Units
Produced in this example). This process allows the company to compare actual
costs incurred to what those costs should have been at the experienced level of
activity, and thereby allows more realistic and effective cost control to be established.
With the implementation of the preceding recommendations, the company
will be able to eliminate the entire general ledger function, with annual savings of
$120,000. One of the previously mentioned database analyzers would also be
responsible for the general ledger data files.
Internal Statements for Profit Improvement
The reporting process in the company is typically given little attention unless it is
unsatisfactory to the recipient. Effective reporting is the means by which the
accounting function communicates with the rest of the company. Good reporting
can do wondrous things in communicating effectively within the company, while
poor reporting can be doubly negative in its impact: first, because poor reporting
may have unusable, incorrect, or untimely information and thereby lead to
improper understanding and decisions; and second, because poor reports, even if
accurate, can cause the reader to turn away in frustration if the information
desired is buried deep within a morass of irrelevant (to the reader) or confusing
Division A
Division B
Adj.
Adj.
Budget Actual Variance Budget Actual Variance
Units produced 20,000 18,000 (2,000) 20,000 24,000 4,000
Sales $ 900 $ 940 $ 40 $ 1,200 $ 1,152 ($48)
Costs:
Material 180 190 (10) 240 225 15
Direct labor 126 130 (4) 168 160 8
Var. overhead 122 125 (3) 162 158 4
Fixed overhead _______ 175 ______ 170 _____ 5 _______ 175 ______ 173 ____ 2
Total costs _______ 603 ______ 615 _____ (12) _______ 745 ______ 716 ____ 29
Gross Profit $ 297 $ 325 $28 $ 455 $ 436 ($19)
_______ ______ _____ _______ ______ ____
_______ ______ _____ _______ ______ ____
Exhibit 6.11
Manufacturing Budget Report—Flexible
($$ in 000s)