Flexible Budget Assignment Help

A flexible budget is used to review the prior performance of the units or the organization. A flexible budget is a budget that adjusts changes in the volume of activity. It is adjusted to the actual level of output achieved during the budget period. It adjusts the changes in volume level, expenses, taxes, etc into the budget (Smith, 2002). A flexible budget is better than a static budget for managerial decision making because it provides realistic results through considering the changes into account. For this business budget assignment help paper, the Lorillard, Inc, third largest manufacturer and second largest seller of cigarettes in United States, is selected for which the flexible budget for year 2012 is prepared (Lorillard, 2011). The flexible budget is prepared at three level of the income statement, while consider the absorption costing approach.

Lorillard Inc. flexible budget for the year 2012
	Flexible Budget	Actual Results	Flexible Budget Variances
Expected sales (5.750 billion units)	7475	7648	173
Cost of Sales	4784	4784	0
Gross Profit	2691	2864	173
Selling, general and administrative expense	523	612	89
Operating Income	2168	2252	84
Interest expense	300	128	-173
Income before income taxes	1868	2124	256
Income taxes	691	786	95
Net income	1177	1338	162

(Sources: Baker & Baker, 2009) The flexible budget of Lorillard, Inc shows that higher unfavorable variance in flexible budget. The variance amounts are calculated by using the actual level of activities, while considering the income statement of company. Each flexible line for the income statement is discussed separately. Sales: For sales, it is assumed that company would sell 5750 million units at $1.30. It is assumed that company sales could be increased by 15% from 5 billion units in 2011 due to constant growth in last three years. Company net sales were $6,466 in 2011, $5,932 in 2010, $5,233 in 2009 and $ 4,204 in 2008, which increased by 24% in 2009, 13% in 2010 and 9% in 2011 (Lorillard, 2011). It represents that company net sales is increasing continuously. So, average growth rate of 15% is taken for the next year, which could be achieved by the firm significantly.

But, the company’s net sales could higher than flexible budget due to planned increase in its sales prices (almost $1.33 compared to the flexible budget of $1.30 per unit). Management considers that due to low competition and good image of organization in US market, company would increase the prices and consequently its total sales revenue. Differences in sales prices may create variances in flexible budget. Cost of goods sold: From the last three years’ income statement, it is calculated that cost of goods sold for the company is equal to 64% of its net sales (Lorillard, 2011). In 2011, company cost of goods sold is $4123 that is approximate 64% of net sales ($6466). The lack of variance in flexible budget indicates that cost in total (materials, labor, and overhead) would be same as planned. Selling, general and administrative expenses: The flexible budget includes variable and fixed expenses for selling, general and administrative expenses. With the analysis of past years’ income statement, it is assumed that company spends approximate 7% amount of its net sales on selling, general and administrative expenses (Lorillard, 2011).

To determine the budgeted amount in 2012, the changes in variable expenses need to be included. The variance in flexible budget expresses that Lorillard, Inc variable expenses such as rent, lights and advertising expenses would be higher than planned. It is because currently, company is facing high competition in US market and management views that it would require to spend more efforts and amounts in advertising or marketing activities to increase business, which will cause an increase its selling and administrative expenses (Bates & Tucker, 2010). It is forecasted that administrative expenses of the company might be higher than planned due to increase in electricity rates and uses as planned. US energy and electricity prices have continuously increased in past years that might increase the company’s administrative expenses (U.S. Department of Energy, 2012).

To determine the future expenses, the high competition and increasing trends in energy prices are considered. These are added to the budgeted results that increase the company selling, general and administrative expenses by 1% on company’s net sales. Interest: Company’s interest expenses are rapidly increasing in the past three years. Company paid interest $125, $94, $27 and $1 in 2011, 2010, 2009 and 2008 respectively. Company interest expenses has increased $31 in 2011 in compare to 2010 due to issue of senior notes in the second quarter of 2010 and the third quarter of 2011 (Lorillard, 2011). With the consideration of the past two year income statement, it is assumed that company’s interest expenses will increase by 140% in 2012 compare to 2011. But, management sees that company will not require issuing senior notes in year 2012 that will create variances in budgeted and actual amount. It is estimated in budget that the interest rate will increase by 2% from 2011 investment ($125) due to risk and uncertainty of the market. Income Taxes: Income taxes are budgeted as 37% of income before income taxes. The variance in income tax budget expresses that Lorillard, Inc actual result income before interest rate will be same from flexible budget that is also 37%. Net Income: Total net income in flexible budget will increase from last year because the variances in each lines on the income statement. The net variance is mainly due to higher revenues earned by Lorillard,

Inc. So per budget analysis case study experts says that while preparing the flexible budget at three levels for the income statement, it is learned that variable in expenses, cost or revenue will need to calculate with the consideration of company, competitors and economic situations. It is useful to evaluate business potential in the changing situations in the environment and industry (Finkler & McHugh, 2008). It is also learned from budgeting that it is beneficial to direct the organizational strategies in the positive directions and to ensure the sustainability of the business.   References Baker, J.J. & Baker, R.W. (2009). Health Care Finance (3^rd ed.). USA: Jones & Bartlett Publishers. Bates, D.G. & Tucker, J. (2010). Human Ecology: Contemporary Research and Practice. USA: Springer. Finkler, S.A. & McHugh, M.L. (2008). Budgeting Concepts for Nurse Managers (4^th ed.). USA: Elsevier Health Sciences. Lorillard. (2011). Annual report 2011. Retrieved from: http://www.annualreports.com/HostedData/AnnualReports/PDF/LO2011.pdf Lorillard. (2011). Company Overview. Retrieved from: http://www.lorillard.com/ Smith, G.S. (2002). Managerial Accounting for Libraries and Other Not-for-Profit Organizations (2^nd ed.) USA: ALA Editions. U.S. Department of Energy. (2012). Prices & Trends. Retrieved from: http://energy.gov/prices-trends Get Flexible Budget Assignment Help with assignmenthelpexperts.com From our experts, you will ge complete and original assignment help.