PLANNING AND VARIANCE ANALYSIS
Task one
The budgeting process is one of the paramount exercises in an organization. Some reasons make the planning process crucial: the management can formulate long-term goals, evaluate the staff and department performances, and devise ways of ensuring the company makes a profit; to ensure the organization secures funds (Banks 2018). Also, the firms can allocate cash to the project, which is profitable to the organization as well as the core reason for business existence is achieved. Moreover, the forecasting process enables the organization to get rid of the unforeseen bottlenecks.
The corporations’ executives and directors use the budget to forecast in the future projects of the organization. Moreover, the managers not only put their strength on short-term activities but also they do keep an eye on the ability of the firm to utilize the resources in the future. Consequently, the firms in the hospitality industry can ensure their sustainability (Banks 2018). If the organization does not use the budgets to control their departments and organization as a whole, they are prone to operational crises; eventually, they may collapse.
The corporations in the hospitality industries use the budgets to evaluate the departmental and staff performances. For example, the department that is using more resources than the allocated funds is considered non-performing department. The management categories head of the departments is underperforming as those who are failing the organization. For that reason, the firm can evaluate the staff and departmental performance and make critical decisions in regards to the prosperity of the organization.
Some of the managers in corporations tend to forget the essence of a business in the industry. Furthermore, the act of ignorance and negligence may curtail business profit. As a result, budgeting is used to ensure the managers, and all stakeholders in the company are aware of the core business of the organization; a reason why they should work diligently and efficiently to ensure the business attains its goals of generating profits.
The budget estimates enable hospitality firms to be able to gain profits. The directors of the firms can forecast on functional units that are likely to make gains. Moreover, they can distinguish the department which incurs more expenses. Ultimately, the directors of the company can be able to make sound decisions: to scrap the departments which are more burdening the corporate and to increase the departments such as production unit which will ensure the firm continues to produce more and consequently achievement of profits.
The prudent organization should develop measures which ensure allocation of enough cash to the projects which can generate some money. The budget serves as a tool to allocate resources to the investments projects that can give good returns to the firm. The managers of organizations can gauge the past performances of investing activities from the previous budget and be able to predict if the firm can attain desirable results (Hammond 2016). Furthermore, the budgets assist in setting aside the cash to be used by the organization to operate on a day to day activities.
In spite of the budgeting process playing a critical role in ensuring the profitability of the organization, the management may forget to satisfy the customers’ needs (Hammond 2016). The managers and staff work extremely hard to attain the budget set to achieve the revenues; in the process, the quality of the services or products may be affected; optimally become unsuitable to consumers. The management budgets if not controlled well, can change the morale and the effectiveness of the staff and as a result, the production of default products.
The organization mostly plan a fiscal budget that runs for one year. Consequently, the planning causes the employees, managers, and shareholders to have a fixed operation. The managers may discover an opportunity that if utilized, can generate income for the organization, but because of the budget does not allow the allocation of investments, the organization loses the chance to invest. Moreover, if the budget is not flexible, the firm may be forced to undergo due to the availability of resources.
The directors of the company tend to manipulate the budget to suit their selfish interests: they may increase the expenses to fraud the organization its asset. Furthermore, the managers also reduce the revenue budgets to ensure the excess amount they have siphon from the company’s coffers (John 2010). The rude behavior of the staff may cost the firm in the industry to collapse and results in the undesirable outcomes in the firm as well as in the community.
When the directors evaluate the performance of the employees using the budgets, they tend to cause the employees to develop ethical behavior to attain the budget’s goals. The staff may manage to manipulate sales and expenses for the management to view the employer is working (John 2010). However, the budgets compel the teams over-work themselves or to commit malpractices such as stealing, fraud, and concealing vital information. The organization should consider other methods of evaluating performances because the budget method makes employees uncomfortable, and as a result, the services will not be pleasing to customers.
Task two
The master budget is the standard budget that the organization has targeted to achieve a specific period: quarterly, half-yearly, and annually. In addition, the flexible budget is a budget that vary depending with the variation of the activity or volume. The master budget variance is the difference between the actual cost and the static budget that the organization had set. The organization flexible budget variance is the difference between the actual budget of the items and the flexible cost of the items.
The table below shows the calculation of master budget, inbetweener, flexible budget, master budget variance, and the flexible budget variances.
- Revenue Sales
The revenue sales analysis involve the analysis of price variance and the sales volume variance. The price variance consists of the comparison of the actual price and the standard or budgeted price; multiplied with the exact quantity of goods sold. Moreover, the sales volume is the difference between the actual amount of products sold and the standard amount of goods sold multiplied with the actual price of goods sold.
I.The two ways of analysis
The level one analysis shows the variance of the master budget. The variation is 45.12 U.S dollars. Therefore, the result is favorable meaning the organization is within its statics budget. The actual cost is less than what was budgeted, and such a result indicate the company is utilizing its shareholder’s resources usefully.
The level two analysis indicates the sales price variance and the sales volume variance. The price variance is 760 U.S dollars. The results are favorable and therefore, the organization is selling at a profitable price. Moreover, the sales volume variance is also beneficial since the quantity sold is more than the targeted amount.
- The implications of price and sales volumes variance to profit
The favorable outcome of both price variance and the sales volume variance indicates that the company products are more competitive than the same products in the market. Consequently, the sales revenue of the company will continue to increase and as a result, high-profit margin. Even though the price is higher than the set price, the company continues to attract more sales volumes. Therefore, the quality of the products indicates the company’s performance is desirable.
- Material Cost
Main ingredient three-way analysis
The level one analysis for the main ingredients compares the actual cost of the budget and the master budget. The outcome is favorable since the difference is 45 U.S dollars. The level two analysis involves the calculation of the flexible budget variance: the actual and the flexible cost. The result, for flexible variation, is unfavorable. The third level analysis consists of material cost and the efficiency variance. Differentiating the standard price and the actual cost of materials used, you will get the material cost variance. For the purpose the assignment the beverage is our main ingredients. The material cost variance is unfavorable. The efficiency variance of the company is also objectionable.
- The Implication of the Material Cost and Efficiency Variance on the Company’s Profit
The material cost variance being unfavorable indicates that the department of procurement is reluctant in negotiating better prices for the material. Moreover, the volume of the material used to produce the products are more than required. Consequently, the company is procuring materials which are not quality at a higher price. The profitability of the company, as a result, will reduce significantly.
Task three
The strategic objectives
The corporates are selling its product at a high price, and the volume of the sales are also higher than estimated. However, the material used to produce the product is costly and of low quality, since the company is using more material to create a single product. The firm should prioritize to make changes in its procurement department to ensure the quality of the material used is of high standards. As a result, the product will be of high quality (Scheff 2010). Consequently, the firm will have a competitive advantage of its peers in the market. Since the hospitality industry is competitive, the firm has to strategize more on quality and consumer’s needs.
References
Banks, Alan. Budgeting. North Ryde, N.S.W: McGraw-Hill Australia, 2018. Print.
Hammonds, Heather. Budgeting. North Mankato, MN: Smart Apple, 2016. Print.
John Graham. Financial Management. Mason, Ohio: South-Western, 2010. Print.
Scheffé, Henry. The Analysis of Variance. New York: Wiley-Inter-science Publication, 2012. Print.