Master and Flexible Budgets
January 28, 2013
Date: January 28, 2012
To. Guillermo Furniture Company
From: Ashley Lee, Ebony De La Torre, Janelle Durham, Misha Cross
Re: Master and Flexible Budgets
Guillermo Furniture: Master and Flexible Budgets
A 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 in the budget and make corrections to employees. The following memorandum on Guillermo Furniture Store includes a master budget. The explanation of the relationship between fixed and variable cost used in the budget will occur. The difference between static and flexible budgets and how a flexible budget lends itself to a cost-volume profit analysis will be discussed.
Fixed and Variable Costs
Fixed costs in a budget remain constant even when volumes fluctuate. Fixed costs include a portion of the benefits and the depreciation, indirect labor, insurance, property tax and, supplies for a total of $ $596,067 per year. This amount remains the same regardless of the amount of items produced.
The amount of fixed costs in a company's cost structure determines the magnitude of operating leverage. Guillermo chose to automate production process by automating his production process. Therefore, Guillermo significantly increased his operating leverage. The impact that this has on an organization from an operating leverage perspective is the understanding that increasing sales volume even in the smallest regard can pay off substantially as the difference between the fixed costs and the increase in most instances is pure profit. According to Edmonds (2007), "When all costs...