Budget Management Analysis
HCS/571 Financial Resource Management
June 27, 2011
Dr. Lena Watson
Budget Management Analysis
Budget management analysis is used by mangers as a tool and helps determine that all resources available are being used efficiently. The budgets are determined yearly and are based upon the previous year’s budget and variances. This paper will discuss specific strategies to manage budgets within forecast, compare five to seven expense results with budget expectations, describe possible reasons for variances, give strategies to keep results aligned with expectations, recommend three benchmarking techniques, and identify those that might improve budget accuracy, and justify the choices made.
Strategies to
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Variances may be within the budget which is favorable, or over the budget which is unfavorable. The variance is used to predict the budget for upcoming years, help with spending during the current year, and help with evaluating the managers and their departments. To determine the cause of variances the managers must investigate and justify to upper management why the variance occurred. There are a variety reasons for variances, which must be identified and controlled if possible.
While analyzing the nursing expense results from various units for a pay period, there were some favorable and unfavorable variances. While reviewing the expense record the paid productive hour’s variance was within the budget and the paid nonproductive hour’s variance was 60 hours over the budgeted hours. The unfavorable variance of paid nonproductive hours may have occurred due to some staff being on modified duty, sick leave, meeting time, or education time, which means they are getting paid with no patient care involved. The overtime percentage of hour’s variance was 7.5% over the budget and the registry percentage of hour’s variance was 8.0% over the budget, both are unfavorable. The overtime may have been caused by bad time management, late arrival of the next shift, or working past shift hours due to not enough staff. The increase in the registry hours may have been due to not enough regular staff due to
The company had a budget of $5,247,250, with the flexible budget being $5,117,385, however the final numbers were $5,096,847, which gives the company an unfavorable variance of -$130,065. Total Variable Cost however was a favorable expense. With a planned budget of $3,967,962 and a flexible budget of $3,869,612 the actual output was $3,805,400 the favorable variance came out to $98,349. Contribution margin was also an unfavorable variance (-$31,716).
Another concern identified, is the utilities expense budget for utilities in Year 9 which is $150,000. This amount is identified as a fixed amount and is unrelated to actually production activities and manufacturing efficiency. Considering that production levels and activity fluctuates throughout the year, the budget for utilities should be a variable item. An example; from Year 7 to Year 8, the utilities expenses increase by $15,000 and with this detection, ways to reduce this expense should be investigate. Another concern is a duplicated line item under the Selling, General, and Administrative Budget for Utilities and Utilities and Services. Another issue for concern, Total Variable Cost was reported to be lower; however was not enough for the lack of sales combined with an increase in advertising and transportation which resulted in an overall negative result. The low Net Sales directly impacted the Contribution Margin which decreased by $49,397. Overall, these concerns indicate the need for a flexible budget with variance analysis.
15. What are your thoughts of the importance of understanding the per patient day (PPD)
The main reason behind it is that the variance analysis of materials, labor, and overhead indicates the difference between original budget and actual sales/amount. It explains that the management should make changes in the budgets in order to diminish the chances of failure (Epstein & Jermakowicz, 2010). Moreover, the company should make changes in its all budgets like production budget, sales budget, manufacturing budget, selling budget and general & administrative. These changes would be helpful to reduce the difference between the actual and projected sales of the firm.
Variance Analysis is used to promote management action in the earliest stages. It is the process of examining in detail each variance between actual and budgeted costs to conclude the reasons as to why the budgeted amount was not met (Ventureline, 2012). There are several factors that go into a variance report. One is the assumption of the department. The second is the risk of the assumption. And thirdly the actual expense used to portray the budget. The vice president announces the budget that needs to be met monthly. Upon receiving the monthly budget results, the materials budget was not used properly, and the salary was higher than the planned budget. I will be explaining the
Use of the flexible budget shows the budgeted operating income given the actual sales. When you compare the flexible budget to the actual budget you are able to compare the total sales and cost incurred given the same units sold. The sales price variance, which is the actual sales less the flexible budgeted sales, was $14,700 favorable. This means that actual sales were higher than budgeted sales at that usage. This is attributable to the increase in service price from $25 to $26.40. Price variance for material usage was $2,100 over the flexible budget projection. This could be attributed to overuse or waste of materials. As expected, the direct labor price variance was $3,375 lower than the flexible budget amount. This is attributed to the manager’s effective use of labor. Operating expenses were also higher than the flexible budget
Overhead costs include rent, office staff, depreciation, and other. Once the flexible budget was complete, variances between the actual and flexible budget could be calculated (Exhibit B). The variance for frame assembly was favorable with actual costs being $82,663 less than in the flexible budget. The variances for wheel and final assembly however were both unfavorable. Wheel assembly had an unfavorable variance of $50,650, while final assembly variance was the highest at an unfavorable variance of $231,200. Taking into account these three aspects of direct cost, direct cost has an unfavorable variance $199,187. Although most overhead costs are fixed, 2/3 of other costs are variable and increase with the increased production. As shown in Exhibit B, overhead variance is unfavorable at $60,000. The direct cost variance and overhead variable together lead to a total unfavorable variance of $259,187.
The budget for the city of San Clemente, California, fiscal year 2011 can be found at the following link:
In conclusion, operating budget and variance analysis are very important to a business. Using the operating budget and variance analysis is the best way to get the most accurate information on how well a business is doing and can greatly affect how management makes decisions for the
Budgeting is crucial in the well-being of a company especially the financial health status of a company. In fact, no professionally managed firm would fail to budget, since the budget establishes what is authorized, how to plan for purchasing contracts and hiring, and indicates how much financing is needed to support planned activity. It is routine for a company to budget for its expenses. Expense budgets act as a guideline of how much revenue a company would require keeping the activities running. It is used to set the company’s targets for a certain period.
A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496) The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred.
Based on the numbers from the budget variance, the only unfavorable aspect is that of the labor efficiency. It is clear that the labor force needs to be investigated to right this deficiency. Whether it is more proper training, which would inevitably come at a cost, or if the amount of people in a certain department is not sufficient, it is necessary to look at why there is the discrepancy. Whenever the budgeted amount is greater than the actual sale it is indicative of pricing, not enough inventory or other underlying factors such as theft etc.
Budget is the major financial and economic statement. The role of the budget is to keep track of the money coming in and the money going out. It is essential part of running any business effectively. It can help make a short and long term projections about financial situation, avert a financial crisis and plan for major financial changes.
Companies will have set guidelines to trigger the need for a variance report such as variances over a specific percentage or dollar amount. (Cleverly, Song, & Cleverly, 2011, Pg. 381) In an analysis of revenues, a negative variation is unfavorable; in an analysis of costs, a negative variation is favorable. (Dove & Forthman, 1995) Variation is calculated by subtracting the expected or budgeted figure from the actual figure for each variable. The variable figure is then divided by the expected figure in order to establish a percentage of the variance. Wages that are over the budgeted amount would be an unfavorable variance and would be an indication that there is a need for a variance report. (Dove & Forthman, 1995) Supply costs being less than the budgeted amount would be a favorable variance, however it could result in the supplies budget being reduced if there is not a reasonable explanation as to the cause for the variance. Therefore, a variable department manager would ask for a variance report detailing the reason for the variance to be completed, otherwise it appears as if the budget is overstated and needs to be reduced.
This research paper is a brief discussion of budget management analysis. Budgeting is the key to financial management, and is the key to translates an organization goals or plan into money. Budgeting is a rough estimate of how much a company will need to get their work done, and provides the basis for evaluating performance, a source of motivation, coordinating business activities, a tool for management communication and instructions to employees. Without a budget an organization would be like a driver, driving blinded without instructions or any sense of direction, that’s how important a budget is to every organization and individual likewise (Clark, 2005).