Budgeting plays an important role in an organization, it help leaders in the organization make plans and perform according to the desired budget and deviate from it as less as possible. In this paper the budget analysis is presented and the variance will be discussed. The outcome of increasing the marketing expenses in T & P Fashion, it has be decided that the management must pay attention to the variances and work towards its improvement.
The flexible budget is a type of budget where the budget adjusts itself on the basis of the volume of activity. Any deviation from the estimated budget is termed as the variance of the flexible budget that can be either favorable or unfavorable (Kaplan & Atkinson, 2015). Here is the …show more content…
Shop Assistants/ Favorable
Favorable variance in the shop assistants shows that the company has managed to decrease the extra labor charges that could lead to unnecessary reduction of profit. The shop assistants results have resulted in favorable variance due to reasons such as using efficient staffs thus reducing the need of more staffs or negotiating less wage for each staff (Braun, Tietz & Harrison, 2013).
The unfavorable variance in rent signifies that the rent expenses have gone beyond the estimation made by the budget organizer. This could have happened to an unexpected increase in the market prices of the rent or extra production leading to a need for extra place to store goods (Kaplan & Atkinson, 2015).
Effect of Increasing the Marketing Expenses by 5 percent
Increasing the marketing expenses would reduce the overall operating profit making it an operating loss. This loss would also affect the cash availability in the company due to which the management would not be able to get any bonus as there would be heavy cash crunch. It is advisable to the management to not spend extra amount on the marketing.
Conclusion and recommendations
Preparation of flexible budget is very important for the management as it helps them to allocate the expenses. Further, if the actual expenses of the company deviate from the budgeted one, it would be
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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.
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
With the increasing ramification of economic changes and complex business functioning, each and every company has to implement budget variance analysis to identify the fluctuation in projected amount. In this report, Peyton Approved Company has been taken into consideration to evaluate the effectiveness of business functioning and plant’s operation in determined approach. It reviews the efficiencies and effectiveness of their plant’s operations. With the help of budget variance, it could be easily determined whether Peyton Approved Company has been performing its business throughout the time. Budget variance is the technique which is used by Peyton Approved Company to identify the fluctuation and variability in the set budget and implemented project. Budget variance is defined as differences between the actual amounts of expense incurred by Peyton Approved Company. It is evaluated that when Peyton Approved Company has positive cash flow in its planned budget. For instance, if amount of expenses incurred by company is less than its planned or estimated budget expenses then company has positive budget variance and vice-versa. This could be defined with the estimation of cost budget variance. The formula for the same has been given as below (Steffan, 2008).
Since a company’s’ budget is typically based on knowledge from their financial history therefore, if a budget variance occurs, it can be because inaccurate estimates were done, or one or more factors have changed unexpectedly, and the company need to make some type of adjustments to their budget. Once a company discovered a significant budget variance, they will need to identify the cause, and address it accordingly. For example,
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.
Static Budget is a budget that never changes, even if the activity level changes. However, the Flexible Budget changes based on actual activity. The flexible budget is more accurate than the static budget because budget amounts change for changes in activity.
A variable department manager has many factors to consider when interpreting and analyzing a variance report. Variances can be attributed to factors such as increased or decreased volume, wage increases, cost increases for equipment and cost increases for supplies. Variance reports are a tool that can be utilized to analyze how well a company is doing with meeting current budgetary goals as well as a means for forecasting information for future budgets. In preparing a variance analysis report to be presented to the vice president, the information needs to be simple enough to understand easily, but detailed enough for the information to be useful to
No project is done perfect the first time; there is always a chance an error that needs correction or new ideas to make it perfect. So it is with creating and monitoring a budget. Having an accommodation for changes in a budget is a very good practice. It helps managers and budget developers respond to competitive setbacks or breakthrough more precisely and quick; by using available resources for good opportunities or correction of errors.
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.
The 20’s century saw the use of budget involve due to a change in the environment. Indeed the control of output used to be obtained by the dissemination of tasks and so traditional budgets were very much highlighted, with a significant top-down influence. As an example of the importance of budget in the 1970’s IBM had about 3,000 people involved in their budgetary process. During the same period, the oil crisis brought concerns about rising in costs and led to the introduction of zero-based budgeting (ZBB), which can lower cost by avoiding blanket increases or decreases to a prior period’s budget. The increase in business uncertainties was in discrepancy with the stifling effect of fixed plans, promoting the use of rolling budgets. The 1990’s saw the growing influence of shareholders and steered the focus on a budget that included a wider view of organisation results, answering the investment community for quarterly updates on results and expectations (Bill Ryan, 2005). Budgets then started being used as a communication tool between the financial community and the organisation, allowing the corporation to be integrated in the capital market. Moreover companies started using flexible budgets rather than static budgets as nowadays various levels of activities can be observed in most organisations. The use of flexible budgets then enables firms to be consistent with their new environment and the market.
One criticism of Hope and Fraser is that budgets use a mechanism called fixed performance contracts. They contend that when budget related elements have changed during budgeting period, a fixed goal may stand a poor performance evaluation criterion.
This project seeks to bring out the budgeting and budgetary control practices of UT financial institution, Koforidua, and how they can make sure their budgeting practices are done in such a way as to incur minimal or less cost for the organization