VARIANCE AND BUDGET ANALYSIS
Task 1
Q1
The Purpose of Budgeting
The management accountants in the organizations use the budgeting process as an essential tool to guide the corporate how they will raise and spend their money. Consequently, the budgeting process ensures that the company has basic controls to increase revenues as well as spending (Callen 2011). Therefore, the main reason of budgeting in the organization is to provide the guide on how the money will be raised and spend in an organization for the specific period: monthly, quartile, half-yearly and annually.
Budgeting process ensures the firms have put internal controls that will ensure that the achievement of targeted revenue. One of the measures that corporates does is to ensures all the head of the department especially for marketing and sales department remain focus on the amount set aside to be generated by the organisation (Roy 2017). Consequently, all the management is and strict regulations to ensure the company achieve the revenues target. When the company makes more than the budgeted revenues, the corporate is considered going in the right direction. However, when the organization returns are below the static budget, the management raises concern to its staff and put more pressure on them to perform better.
The management also uses the budget to plan how they will spend the money they have. As a result, management set certain restrictions that the staff should follow. The overspending department is put on caution by the management of the firm. Consequently, the spending planning is an essential internal control that the corporate can use to manipulate the spending of resources within the organization to fit its goals and the objectives of the firms. Even though the authorities causes hindrance of the staff and the company operation at the time, they are paramount to the organization since without proper measure to utilize the organization assets the company may result from losing.
Q2
Demerits Budgets as a tool for staff’s Performance Evaluation
The use of the budgeting process to gauge its staff performance is can cause detrimental effect in an organization: the staff is forced to manipulate the revenues and expenditure budgets to please the management (shield 2014). Since most employees do not want to lose their jobs, they may end up concealing critical information concerning the company. Conversely, such action would deter the growth of the business, and as a result, the profit margin would reduce or even loses incurred in the process. Therefore, the organization should use other criteria to perform job evaluation and employees performers to eliminate fraud and theft in the firm.
Task 2: Variance Analysis
Wedding/ Event/ Functions 1 budgets
Revenues
Two level analysis
The two-level analysis for the sales revenues involves three calculation: master budget variance, price variance and the sales volume variance. First, the master budget consists of the calculus of the differences between the static budget of the firm and the actual amount spend. If the actual budget supersedes the master budget, then the outcome is undesirable, and the firm is paying more than its budget. Also, such spending, if not regulated, can lead to the eventual collapse of the corporation. Second, the price variance put into consideration of three items: actual cost, standard cost, and the exact quantity of goods sold. Therefore the formula for the price variance is actual cost less the standard value multiplied with the actual amount of products sold. Third, the calculation of the sales volumes involves the exact quantity of goods sold, the common goods, and the profit margin.
Consequently, to find the sales variance, you need to multiply the balance between the actual and the standard products with the profit margin. When the management obtains the difference, the firm can be able to determine how the utilization of resources will be don. Essentially, variance as a tool of control is essential to the organization development and sustainability,
The table below shows the calculation of the difference for master budget, price variance and the sales volume variance.
The level o1 analysis
The level one analysis involves the calculation of the master budget variance. The figures indicate the difference is negative $1293.99. If the organization spends more than the budgeted amount, the company will is headed on a financial crisis if the overspending trend continues. The red color for the outcome indicates the unfavorable result for the master budget.
The level two analysis
The level two analysis involves the calculation for the price variance and the sales volume variance. The price variance is $2800; sales volume variance is $3124. Consequently, the products were bought at a higher price than the anticipated price while the sales volume did not exceeds the target sales. The green colour shows that the price variance was favourable and the red color shows that the sales volume variance was unfavourable.
Possible arguments for the Sales Price and Sales Volume Variance
The product price was more than the anticipated budget consequently the outcome was favourable. The reasons for the increment of the cost may be the quality of the goods produced or the consumer preference for the products rather than the other products from the industry. The demand is low since the targeted number of people were below the expected number and therefore, only the product quality could raise the price higher than anticipated or lack of the commodity in the market. As a result, the profit margin may increase through the sales volume may be minimal than expected.
The sales volume variance is negative, meaning the actual sales were less than the anticipated sales. The possible reason for the transactions being lower than expected could be the demand for goods was smaller, or the company did not conduct a thorough marketing program that would efficiently ensure the buying of the sales. Whether they are of low quality or not. Firms’ ability to market and conduct promotional service seems inadequate depending on the number of people who attended the wedding event. Consequently, the low sales volume could lower the revenues collected and as a result, reduce the profit margin.
Direct Material Cost
Three level analysis
The three-level analysis measures the master budget, flexible budget, inbetweener, master variance, flexible variance, material cost variance, and the efficiency variance for our main ingredients which is beverage in case of the wedding event. Master budget for the central part will be the actual cost less the static cost. The flexible variance will be the actual cost less the flexible cost of the element. Moreover, the material cost variance formula variance will be when standards quantity and price are multiplied and deducted from the multiplication of the actual price and volume while the efficiency variance is the exact quantity is subtracted from the standard amount and reproduced with the standard rate.
The table below shows the calculations for threes level analysis
- Level 1analysis
The level one analysis measures the variance for the master budget. The main ingredient variance is negative $1293.99 and therefore unfavourable. The organisations used more money for the production of the ingredient. The organisation ability to utilize its resources is not superb.
- Level 2 analysis
The level involves the calculation of the flexible variance. The outcome is negative $3070.70, meaning the result is unfavorable to the organization. The corporate should be cautious because processing cost should ensure profitability to the firm.
Level3 analysis
The level measures the material cost variance and the efficiency variance of the firm. The efficiency variance is negative $2902.7, meaning the outcome was unfavorable. Furthermore, the material cost variance is negative $ 2902.70 and consequently, unsuitable.
The possible causes of the variance.
The cost of purchasing the material is more than the set value even though the material used is more than the estimated .consequently; the firm is buying the low-quality materials at a higher price. One of the possible reason for the deviation is the procurement department managers who manipulate the prices the items though they are of low quality. The variance will affect the net profit of the company; adversely: the net profit will reduce effectively.
Task 3
The Corporate Strategic
The hospitality industry requires the organization to be extra creative in terms of marketing strategy, processing, and production cost, and the efficiency of the staff to cater to the consumer’s needs. The corporate should henceforth set aside a fund to do through promotion campaigns that promote corporates products (shield 2017). Management should also restructure its procurement and finance department to ensure the material that are bought are genuine and of high quality and the prices are not inflated: due diligence is required. The use of quality material will lead to the production of the quality product. The consumers need will, therefore, be satisfied, and demand for the products will increase. The business will thrive and expand, and its competitiveness in the industry will be unbeatable.
References
Callen, k. 2011. Reasons behind contemporary use of budgets. Lund, Sweden.
Roy key. 2017. Beyond budgeting or budgeting reconsidered? A survey of North-American budgeting practice. Management of accounting research.
Shields, M.D., 2014. Budgeting research: three theoretical perspectives and criteria for selective integration. Journal of Management Accounting Research, 15(1), pp.3-49.