ACC 202: Final Project Part I Budget Variance Report Submission

The assignment content discusses the concept of an operating budget and variance analysis, which is a crucial tool for businesses to understand their financial performance and make informed decisions. The operating budget portrays a company's expenses, expected costs, and estimated income, considering quarterly or annual performance. Variance analysis helps identify the reasons behind unfavorable variances, such as faulty budget assumptions or differences between actual outcomes. The concept can be applied to Peyton Approved to help its manager prepare an operating budget and variance analysis for the July-September quarter.

ACC 202: Final Project Part I Budget Variance Report Submission
Tania Farhat
Southern New Hampshire University

Peyton Approved
Operating Budget and Variance analysis Report
Quarter – July to September
An operating budget portrays a company’s expenses, expected costs, and estimated income,
considering the quarterly or the annual performance. The challenging part of completing an
operating budget is to properly estimate the historical data and factor in the probability of
different market variables. An operating budget must take into account historical sales
performance, current trends in the industry or the sector, seasonality, new products expected to
be launched and competitive forces. Often, firms create more than one operating budget aiming
to anticipate a potential decline in revenues or a new product launch that could boost
profitability.
An effective operating budget provides details on the price and the expected product volume
to estimate total sales. Therefore, a key component of this budget is sales, followed by variable
costs, fixed costs, interest, and depreciation. Costs include raw materials and finished goods
ready for sale, salaries, wages, utilities, rent or mortgage, car maintenance and service, postage,
cleaning, transportation costs, travel expenses, office supplies, marketing/advertising expenses,
insurance, professional services and so on. Interest includes Interest on bank loans and/or
overdraft fees.
Once the budget is complete, accountants prepare a summary to demonstrate their projections.
Often, there is a column for actual costs in order to compare projections to actual revenues and
expenses. One of the objectives of budgeting is to provide a base against which actual results can
be compared. The budget must be realistic, as there is no point analyzing variances against an
unrealistic budget.

Variance analysis can be simply explained as plan vs. actual. Budgets are too often
proposed, discussed, accepted, and forgotten. Variance analysis looks after-the-fact at what
caused a difference between plan vs. actual. When actual results are better than expected results,
the resulting variance is described as a favorable variance and is often denoted by the letter F.
When actual results are worse than expected results, the variance is described as an adverse
variance and is often denoted by the letter A or shown in brackets or preceded by a minus ‘-’
sign. Material cost variance is the difference between the standard material cost for actual output
and the actual cost incurred. Material efficiency variance is the difference in material costs due to
the usage of material. Labor cost variance is the difference between the standard labor cost for
actual hours worked and the actual wages paid. Labor efficiency variance is the difference
between actual hours worked by the workers for production of units and the standard hours
required to produce the actual quantity.
Budget variances can happen for many reasons, including faulty budget or simply
differences between budget assumptions and actual outcomes. All material budget variances
should be examined by the Trustees/Board of the organization and every variance should
stimulate questions.
The concept of operating budget and variance analysis can be applied to Peyton Approved
to help its Manager in preparing operating budget and variance analysis to understand the
reasons for unfavorable variance. The operating budgets have been prepared for July to
September quarter based on the monthly sales forecast in units July, 18,000; August, 22,000;
September, 20,000; October, 24,000 and product’s selling price is $18.00 per unit and its total
product cost is $14.35 per unit.

Based on sales in unit’s estimates, sales price, product cost, company policy and cost
methods with respect to inventory, labour and estimates of general and administration expenses,
sales budget, production budget, manufacturing budget, selling expense budget, general and
administrative expense budget have been prepared for Peyton Approved in Budget worksheet.
The budgeted values are computed in the worksheet for operating budgets for the quarter
July to September, sales budget is $ 10,80,000, the manufacturing budget is $ 2,12,195, direct
labour budget is $4,80,000, factory overheads budget is $1,41,000, selling expanse budget is $
1,40,850 and general and administrative expense budget is $44,100.
Manager of Peyton Approved can use variance analysis to understand the financial
performance. It is explained by demonstrating the variances of Material and Labour in variance
worksheet. The material cost variance is $7750 unfavorable. Primary reason for the unfavorable
material cost variance is the actual quantity of raw materials used for production is more than the
budgeted/standard quantity by 1000 units for the quarter. Further details need to be analyzed for
any error in estimate.
The labour cost variance has two components, labour price variance and labour efficiency
variance. For Peyton Approved, it can be drawn the labour price variance as $ 33000 favorable
and labour efficiency variance as 48000 unfavorable from variance worksheets. Labour price
variance is favorable due to actual labour cost per hour is $1 lower than standard cost where as
labour efficiency variance is unfavorable due to actual number of hours worked are more than
the standard hours by 3000 and over all labour cost variance is unfavorable which will impact the
profits of Peyton Approved to fall.

The manager of Peyton Approved need to inaite the action for the variances and take
appropriate steps for correction.
References
1. Nobles, T. L., Mattison, B. L., Matsumura, E.M. (2014). Horngren’s financial and
managerial accounting(5th ed.).Upper Saddle River, NJ: Pearson Education, Inc.
2. http://www.cpaireland.ie/docs/default-source/business-resource/budgeting-and-variance-
analysis-for-community-and-voluntary-organisations.pdf?sfvrsn=2
3. http://www.myaccountingcourse.com/accounting-dictionary/operating-budget