Flexible Budgeting at Procter and Gamble Managerial accounting class. Examine the budgeting process at a company. (use a us fortune 500 company) identify strengths and weaknesses of the company's Budgeting process.

Flexible Budgeting at Procter and Gamble

Budgeting process at Procter and Gamble

Procter and gamble uses a tailored budgeting process that is flexible to the ever changing realities in the business world. The budgeting process is preferred to using an outdated standard budgeting process that is stringent to the needs of the observable dynamism in the world of business. The budgeting process involves flexible roll out of forecasts that are adoptive to time dependent events in the market (Blocher, Stout, Cokins, & Chen, 2008).

Realistic long-term goals are used to achieve sustainable growth. Depending on the overall contribution of a business, different targets are made on the full budget portfolio. Research and development and innovations in the plans and budget are included in order to avoid haphazard plans. This aspect ensures that a balance is struck to set in aspects of accuracy in speculation and long-term discoveries (Blocher et al., 2008).

Advantages of Flexible Budgeting

Flexible budgets

The ineffectiveness of fixed budgets for control purposes can be dealt with by using a flexible budget instead. A flexible budget is designed to change as a business's activity increases or decreases (Ivo Welch, 2000).

Using sales volume to flex a budget

When the volume of sales differs from that which was budgeted it makes sense to revise the original budget's variable costs and revenues. For example if actual sales volume is 10 per cent higher than the original budget we should increase the variable costs budget by 10 per cent. Otherwise, those differences between the budget and actual figures that are solely due to volume differences will mask the variances due to differences in purchases prices and usage efficiency (Ivo Welch, 2000).

Using flexible budgets for control purposes

Flexible budgets are particularly valuable for control purposes in manufacturing industry because...

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Standard hours

Budgeted and actual sales volumes can be measured in units, tonnes or litres if there is a single product. It is more difficult to find a single measure for output if there is more than one product. One solution is to use the standard time required to achieve the particular level of output. As you would expect, standard time is measured in standard hours and minutes (McKinsey, 2002). Official definition of standard hour or minute is the amount of work achievable, at standard efficiency levels, in an hour or minute (Axson, 2010). The standard time may relate to machine hours if all output goes through the same, or similar, machines. Standard time can also relate to process hours, if all output goes through the same process. However, in most cases standard time relates to direct labour hours, whether for a manufactured product or for a service.

Most costs vary with input-based activity levels, e.g. direct wages vary with direct hours worked. However, the flexible budget 'allowance' should be based on output measures, such as tonnes delivered or standard hours produced. This will highlight the efficiency with which resources are used. So, we should identify those costs and revenues that vary with output and amend the budget to reflect actual activity, before comparing it with actual costs and revenues (Axson, 2010).

Format for flexible budget operating statements

Flexible budgeting can be used in both marginal and absorption costing systems. In an absorption costing system the fixed costs are also flexed to match output. This approach is misleading as it implies that fixed costs are variable, and so requires a 'volume variance' to be calculated if any over- or under-spends are to be isolated. Many managers find flexed absorption costing budgets confusing. If you prepare a flexible budget in the examination it should always have a marginal costing format (McKinsey, 2002).

The linear assumption

Budgets contain several activities so variations in their costs may not always be linear. For…