Planning and Budgeting and Profit Analysis

Module 3 Discussion
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Module 3 Discussion
Planning and Budgeting
A budget is a financial plan that identifies anticipated earnings and spending for a given time, generally for an entity, company, or person. Simple and flexible budgets are two popular budgeting approaches, each having distinctive features and implications for variance analysis. Simple budgets are predicated on set assumptions and remain constant irrespective of performance. It is usually created at the start of the budgetary term and remains the same throughout. Fixed assumption is one of the main characteristics of a simple budget (Shim et al., 2021). With the assumption of a certain level of output or sales, revenue and expenditures are calculated at a single set of levels.
Additionally, any variation that appears when comparing the simple budget to the actual financial outcomes is typically brought on by variations between the budgeted and actual statistics. Adjustments to outside circumstances, unforeseen occurrences, or managerial choices may bring these variations. Simple budgets can be restrictive and may not be able to be modified with the activity level or other changes in the situation. It does not offer any information about potential performance variations due to changes in activity.
A flexible budget, on the other hand, is made to respond to variations in activity levels. It considers how revenues and costs might fluctuate when activity levels change and is based on various possible activity levels. Different scenarios or activity levels are frequently considered when creating a flexible budget, allowing for a more accurate and responsive portrayal of anticipated financial consequences (Shim et al., 2021). Besides, variance analysis becomes more useful when actual outcomes are contrasted with a flexible budget. Volume variances and price/efficiency variances are the two components that make up a variation. While price/efficiency variations reveal changes in the cost or income per unit of activity, volume variances represent fluctuations in activity levels. When faced with uncertainty, management can use a flexible budget as a beneficial tool since it can adjust to changes in an organization's environment.
Profit Analysis
The fee-for-service (FFS) model and the capitated environment are different...