Unfavorable Budget Variances

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

Planning is a function that is employed by every organization in projecting the future outcome of the firm. Successful firms achieve their goals through the use of different types of budgets. These budgets include, production budget, sales budget, labor budget and expenses budget. These budgets also show the targets that should be achieved by the firm within the budgeted time plan.

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.

This was favorable, but the Efficiency Variable was 100,000 unfavorable. This suggest that Competition Bike received a great price, but with the unfavorable Efficiency there were a lot of left over materials suggesting the material might not be the best quality. Direct Labor had a 150,000 Unfavorable Variance, but had a 50,000 favorable Efficiency Variance. The labor cost was up due to the high skill level needed for the bike manufacturing. The 50,000 favorable Efficiency Variance enabled the high skill labor to perform the task very efficiently. The Manufacturing Overhead had a 24,000 unfavorable Price Variance, and a 2426 unfavorable Efficiency Variance. The Advertising Cost had a 5,000 unfavorable Price Variance and a 1246 favorable Efficiency Variance. This suggest that Competition Bike spent more on Advertising in order to boost lagging sales, and the favorable Efficiency Variance shows that even though more was spent than budgeted, the money spent was efficient and worth the increase. The Transportation Out had a 3207 unfavorable Price Variance and a 2400 unfavorable Efficiency Variance. This suggest that Transportation cost were up due to increased fuel cost, and this increase in cost resulted in unfavorable Efficiency Variance due to transporting fewer bikes with increase in fuel cost.

Advertising Expenses went over cost for an unfavorable variance of $3,754 from a standard budget of $28,412 and a flexible budget of $27,708. The extra money spent towards advertising may have been to help boost extra sales towards the end of the year. Transportation Out also went over its budget for an unfavorable variance by $5,607. However, there is more to the Transportation Out than what the budget says. The price of shipment is supposed to be $30 per unit and with 87 less units sold; there should be an extra $2,610 in the budget. This requires extra investigation.

Variable Costs. Overall the company had favorable variances in variable costs, excluding the efficiency variance. As expected, since Competition Bikes sold less than predicted, their related costs: direct materials, direct labor, manufacturing overhead and variable expenses were less than budgeted amounts showing a favorable variance. The labor and overhead revenue and spending variances however, showed unfavorable due to actual output despite the changes to the flexible budget. With the prediction of decreases costs based on sales, these costs should have also decreased. There is no further information on why these rates were high, Competition Bikes will need to look into those expenses.

Budgeting and Variance accounting presume that managers should fix problems, not bury or hide them. It also presumes that these problems are short-term problems, and can be effectively controlled in the future. Sometimes there is a change in actual costs that necessitates a change in standard costs. For instance, a new labor contract could increase total labor costs by a predictable amount. Standard labor costs should be re-calculated to reflect the new actual

The next four variances were favorable ones for the company. Direct materials, direct labor, manufacturing overhead, and variable selling expenses all had favorable variances. This is to be expected as the company sold fewer units than they had projected for. Competition should be spending less on variable expenses when they are producing less than expected.

The variance overhead variance is unfavourable for leather jackets indicating NLJ spent more on variable overhead to produce leather jackets than budgeted. This was because new specialized sewing machines had to be purchased to meet the increased production demand of leather jackets.

Because he never wanted to lay off an employee, the MOV was always large in months when business was slow. (Lambeth assigned idle workers to general cleanup and repair work, and charged their wages to indirect labor.) Of course, Lambeth realized why the MOV was so large. What he was worried about, however, was Mrs. Carter. Mrs. Carter, a neighbor, had stopped by the shop one day in early September to get a price on some cabinets she wanted built. Lambeth’s son, Jack Jr., spoke with her. Jack Jr. was working in the shop while on summer vacation between his first and second year of graduate business school. He studied Mrs. Carter’s plans, and estimated the cost of building her cabinets to be $1,625. His job-estimation sheet showed the following: Lumber Finishing materials Direct-labor cost Overhead $590 75 640 __320 $1,625

Conceptually, the change in amount of jobs that Squeaky Horn had this year is likely to explain the difference between planned and actual results. One normal thinks an increase in work equates to an increase in revenues and while this is can be true and increase in work also increases the expenses. In reference to Squeaky horn the minor orchestral repairs experienced an increase in jobs but that also caused overtime pay. The minor band repairs experienced a decrease in jobs but there was an increase in hours worked and since these employees were paid hourly there was an increased expense associated with these activities. Additionally there was an increase in revenues, which increased the owner bonuses. These changes along side with the increase

From the readings, “A budget variance is a difference between the actual results of someone’s financial activity and the expected budgeted results” (Siegel & Yacht, 2009, p.104). The differences in the outcome of financial activity and the projected budget resulted in budget variances. A person is expecting his or budget on the ground of the financial history, which can be both microeconomic factors (family or career) and macroeconomic factors (inflation or unemployment). But unknowingly, there are variances in budgeted financial calculation. In the case of Jake, who discovered a large budget variance in his gas (fuel) expenses, the following measures can be taken to help him come out of the menace:

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 information used to calculate the total direct material and total direct labor variances are retrieved from the cost/ price variance and efficiency variance data. The material variance is zero, meaning there have been no changes for the cost of materials. The labor variance was favorable due to a fall in the labor rate. The efficiency variance for direct labor tells management how efficient the direct labor was in making the actual output that was produced by the direct labor. With that being said, in this case it is considered unfavorable. This is because, both the labor rate and efficiency of the labor has been reduced. The areas that should be reviewed at Peyton Approved include product design, reduction of scrap,

Ferguson & Son Manufacturing should adapt a flexible budget system to improve efficiency. Garrison, Noreen & Brewer (2012) define a flexible budget as “an estimate of what revenues and costs should have been, given the actual level of activity for the period(p.385).” Garrison, Noreen & Brewer (2012) go on to say that “when a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the static planning budget (p.385).” The activity level will change each period, through out the period as the business activity increases and decreases. Emory says, “those reports don 't tell the whole story. We always seem to be interrupting the big jobs for all those small rush orders. All that set up and machine adjustment time is killing us.” This is an example of the type of activity that is going to happen and needs to be taken into consideration when one is evaluating efficiency. The flexible budget will take into consideration this activity and compare the costs to the same level of activity. The current planned budget does not take this into consideration and these are issues that the supervisor has no power over. With the knowledge from the flexible budget, Robert Ferguson Jr may decide that if they purchase a new machine they could complete these rush orders, not have any idle time and in result increase efficiency. In the flexible budget system,