Flexible budget as a development tool for manufacturing industry

Abstract

Budget is an estimated forecast of future incomes and expenditure for a certain period of time. Budget is usually prepared for regular time intervals such as monthly, quarterly, or annually. Budgets are prepared by the top management of the organization. This research identifies direct materials cost as the most appropriate base for flexible budgeting, and hence it is used as the activity of interest. Differential penalty costs for budget variances specified by the user determine an optimal ratio which is used in developing the flexible budget. In many manufacturing company, plant costs such as depreciation, rent, etc has a very large proportion of total costs, and these aspects tend to be considered as fixed costs. Salary costs also tend to be considered as fixed, because employees are generally guaranteed a basic salary for a working week of an agreed number of hours. As the appearance of growth on service industries, labour costs such as wages or fixed salaries and overheads place a major role on most of the costs of a business, and direct materials will have a relatively small value under total costs.