Budget 2019: Variances and Nature of Variances

Running head: REPORT 1
INTRODUCTION TO ACCOUNTING
STUDENT DETAILS:
2/25/2019

REPORT 2
Contents
Requirement 1:............................................................................................................................................3
Introduction.............................................................................................................................................3
Ratio analysis..........................................................................................................................................3
Profitability ratios................................................................................................................................3
Liquidity ratios....................................................................................................................................4
Efficiency ratio....................................................................................................................................4
Conclusion...............................................................................................................................................5
Requirement 2:............................................................................................................................................6
Budget Report..........................................................................................................................................6
Requirement 3:............................................................................................................................................6
Calculation of variances and nature of variances.....................................................................................6
Reasons of variance-................................................................................................................................8
Requirement 4:............................................................................................................................................8
Calculation of nature of expenses-...........................................................................................................8
Calculation of total fixed expenses-.........................................................................................................9
Calculation of total Variable expenses-.................................................................................................10
Calculation of variable cost per unit-.....................................................................................................10
Calculation of breakeven point in unit...................................................................................................10
Calculation of Units-.............................................................................................................................11
References.................................................................................................................................................12
Appendix...................................................................................................................................................14
Requirement 1:..........................................................................................................................................14

REPORT 3
Requirement 1:
Introduction
The financial Analysis is considered as a significant tool. The financial analysis is very
helpful in deciding the company’s performance on the basis of evaluation of an income statement
of company, statement of financial position, evaluation with the help of ratio analysis and trend
analysis. The main purpose of the financial analysis is to decide whether the company is stable or
not, whether the company is solvent, liquid and profitable to affirm the financial investments.
The company can easily make the decisions related to investment. With the help of financial
analysis, the company can decide its strength and weakness. In this report, ratio analysis,
profitability of business, financial stability of business and asset analysis of business is discussed
and evaluated.
Ratio analysis
Profitability ratios
The profitability ratios of an entity are the ratios that decide how profitable an entity is
and how much share’s amount is available for the stakeholders after the expenditure’s payment
(Williams & Dobelman, 2017). The EPS of the entity may only be decided by an entity after the
calculation of the scenario of the profits.
Net profit ratio is a famous profitability ratio. The profitability ratio refers to the ratio that
decides the corporation’s capability to make the revenues out of sale generated in the year. This
ratio establishes the relation between net sales and net profit after the tax. It is calculated by
dividing net profit after tax by the net sales (Caudron, et.a l, 2018). The net profit is the major
standard for the investors, who have made invested in the businesses, to evaluate the economic
condition of the business. The net profit ratio is very is very useful in assessing whole
profitability of the company. The highest ratio states the proper management of the business’s
affairs. To see the improvement of profitability of company, the net profit ratio of smart
computers is compared with industry’s average net profit ratio. The net profit of the smart
computers is -3% in 2017, 11% in 2018 and 25.54% in the year 2019. It means company is
performing well. On the other hand, industry’s average net profit ratio is 21.68% in year 2019. It
means that the position of company is profitable in the comparison of industry.
Further, the gross profit ratio refers to the profitability ratio, which states the relation
between net sales and gross profit (Hançerlioğulları, Şen & Aktunç, 2016). This ratio is useful in
examining the company’s operational performance. The gross profit ratio is calculated by divide
gross profit by net sales. The main elements of the GP ratio is net sales and gross profit. The
gross profit is the net sales excluding the cost of goods sold. This ratio is very significant for the
companies. The gross profit must be proper to cover the expenditures. The highest gross profit
ratio is considered as the best gross profit ratio. The gross profit ratio of the company may be
assess by the comparison of ratio with the ratio of other companies in industry. The gross profit

REPORT 4
ratio of the smart computers is 60% in 2017, 62% in 2018 and 67.75% in year 2019. The
company is doing well. On the other hand, the gross profit ratio of the other companies of
industry is 64%. The gross profit ratio of smart computers is high. It means that the company
have sufficient profit to run company (Alexander, 2011).
Liquidity ratios
To assess the liquidity position of an entity, the current ratio and the quick ratio of an
entity is determined to find out the entity’s ability to provide the current liabilities through the
assistance of the current asset (Brigham & Houston, 2012).
The current ratio is the working capital ratio. The current ratio evaluates the ability of the
business to fulfil the short-term pending obligations in a year. The current ratio covers the weight
of current liabilities versus current assets (Hofstead-Duffy, et. al, 2012). The current ratio of the
company defines the economic health of the corporation and how this may increase the liquidity
of the current assets to set debts. The current ratio of the company should be preferably in the
ratio of 2:1. But, the current ratio of the smart computer is 2.81 in 2017, 1.51 in 2018 and 1.25 in
year 2019. On the other hand, the industry’s average current ratio is 1.90 in 2019. The company
should increase the current ratio for the viability of company. Otherwise, it can lead the
liquidation of company.
The liquidity ratio is known as quick ratio of the company (Rodrigues & Rodrigues,
2018). It is also known as acid-test ratio. The liquidity ratio refers to the ratio that evaluate the
capacity of the corporation to utilize the quick asset or cash to quench or withdraw the current
liabilities instantly. The normal liquid ratio is 1: 1 (Datta & Chakraborty, 2018). The quick ratio
of the smart computer is 2.06 in 2017, 1.08 in 2018 and 0.93 in 2019. On the other hand, liquid
ratio of industry is 1.15 in 2019. The company should increase the quick ratio to one or more
than one to do well (Yanadori & Kato, 2017).
Efficiency ratio
Asset management efficiency is assessed after examining the efficiency and productivity
of an entity to handle the assets (Vogel, 2014). Efficiency of assets management state in respect
of the position of asset in reference of numerous financial information. This assessment assists
the investor to recognize the operation and efficiency of an entity. The efficiency ratios are
chosen for evaluating because this ratio evaluate the ability of the corporation to make utilisation
of asset and source (Brammer, Brooks & Pavelin, 2016).
The inventory turnover ratio (times per year) refers to an activity ratio, which measure
the productivity of the inventory management of the company (Erasmus, et. al, 2016). The
inventory turnover ratio shows that how many times the company normally turns the inventories
in the sale per annum. The inventory turnover ratio may be calculated by dividing the COGS by
the average inventories of the company. For various companies, the ideal inventory turnover

REPORT 5
ratio is four to six. All businesses are dissimilar, obviously, however generally the ratio between
four and six normally means that the rate at which restock articles is balanced properly with the
turnover. The inventory turnover ratio of smart computers is 8 in 2017, 5 in 2018 and 4 in 2019.
On the other hand, the inventory turnover average industry ratio is 8 in 2019. The inventory
turnover ratio of the smart computers is ideal ratio in comparison of industry (Bartram, Brown &
Fehle, 2019).
Further, the account receivables turnover (times per year) is the number of times per year,
which the companies collect the average account receivable (Ferrer & Ferrer, 2016). The account
receivables turnover is useful in the evaluation of the capability of an entity to properly issue
credits to the consumers and take fund in the proper manner. When the account receivables
turnover (times per year) ratio is unreasonably less, the purchaser may view this as chances to
implement the more dynamic credit and collection practice, thus decreasing the working capital
investment required to operate the company (Bernstein, et. al, 2016). The account receivables
turnover (times per year) of smart computer is 3.57 in 2017, 1.92 in 2018 and 1.50 in 2019. On
the other hand, the account receivables turnover (times per year) of other companies of industry
is 9 in year 2019. The company should improved the credit policy for high account receivables
turnover in (Xia, et. al, 2016).
Conclusion
As per the above analysis, it can be concluded that financial analyses is significant tool to
analyze the financial position of the company in proper manner. However, the financial
statement analysis does not render answer to each question of user. In effect, it normally
generates additional queries. The ratio analysis renders an idea to investors in regarding the
financial position of corporation. Through the above calculations of ratios it can be said that the
net profit ratio and gross profit ratio is high. The smart computers also has ideal current ratio and
ideal inventory turnover ratio. The investor is suggested to make the investment in smart
computers.

REPORT 6
Requirement 2:
Budget Report
Particulars Actual Budgeted
$ $
Sales (all on credit) 24,00,000 31,20,000
Cost of Sales 7,74,000 10,06,200
Gross Profit 16,26,000 21,13,800
Selling Expenses
Advertising 1,94,000 3,12,000
Sales Bonuses & Delivery 84,000 1,16,480
Admin. Expenses
Insurance 40,000 40,000
Wages & Other 4,70,750 5,55,485
Financial Expenses
Bad Debts 1,44,000 1,44,000
total expenses 9,32,750 11,67,965
EBIT 6,93,250 9,45,835
Interest 80,250 80,250
EBT 6,13,000 8,65,585
Tax 0 0
Profit after tax 6,13,000 8,65,585
Requirement 3:
Calculation of variances and nature of variances
Variance report
Particulars Actual Budgeted
Varianc
e
variance
%
favourable/
Unfavourable
$ $
Sales (all on credit)
24,00,00
0 31,20,000
-
7,20,000
-
0.23 Unfavourable
Cost of Sales 7,74,000 - - Unfavourable

REPORT 7
10,06,200 2,32,200 0.23
Gross Profit
16,26,00
0 21,13,800
-
4,87,800
-
0.23 Unfavourable
Selling Expenses
Advertising 1,94,000 3,12,000
-
1,18,000
-
0.38 Unfavourable
Sales Bonuses &
Delivery 84,000 1,16,480 -32,480
-
0.28 Unfavourable
Admin. Expenses
Insurance 40,000 40,000 0 - favourable
Wages & Other 4,70,750 5,55,485 -84,735
-
0.15 Unfavourable
Financial Expenses
Bad Debts 1,44,000 1,44,000 0 - favourable
total expenses 9,32,750 11,67,965
-
2,35,215
-
0.20 Unfavourable
EBIT 6,93,250 9,45,835 2,52,585 0.27 favourable
Interest 80,250 80,250 0 - favourable
EBT 6,13,000 8,65,585 2,52,585 0.29 favourable
Tax 0 0 0 - favourable

REPORT 8
Profit after tax 6,13,000 8,65,585 2,52,585 0.29 favourable
Reasons of variance-
The first variance to be analyzed is sales variance. The entity frequently assesses the sales
variance to define the selling performance per month, per quarter or per year. The explanation of
sales variance assists entities separate issues and gears the sales of upcoming period and effort
related to marketing to enhance the sales. The difference in volume of goods sold can be the
reason of sales variance between budgeted result and actual result. The economic condition can
be one of the reasons of sales variance. Specifically, for the entities selling goods or service,
which consumer does not regard as fundamental requirement, economic disturbances may be the
reason of unpredictable sale and greater than anticipated change in the performance regarding
sales. It can be the reason of sales variance in against of budget of entity. The actual sale of
smart computers is less than the budgeted sales. It is unfavorable in favor of entity.
The other variance to be analyzed is administrative expenses variance. The changes in the
activities can be the reason of administrative expenses variance. The planned activities do not
take place such as an appointment of the new member of staff is kept on hold for the foreseeable
future. When there is a possibility of happening of unplanned activity, such as, the member of
team can fall ill or suffer serious disease for the extensive period require the recruitments of
provisional cover at extra cost, then administrative expenses variance takes place (Ihlanfeldt &
Mayock, 2016).
Requirement 4:
Calculation of nature of expenses-
STATEMENT OF COMPREHENSIVE
INCOME
Particulars 2019
nature of
expenses
$
Sales (all on credit)
312000
0 -
Cost of Sales 100620 variable

REPORT 9
0 expenses
Gross Profit
211380
0 -
Selling Expenses
Advertising
3,12,00
0 Fixed expenses
Sales Bonuses &
Delivery
1,16,48
0
variable
expenses
Admin. Expenses
Insurance 40,000 fixed expenses
Wages & Other
5,55,48
5
variable
expenses
Financial Expenses
Bad Debts
1,44,00
0
variable
expenses
Interest 80,250 Fixed expenses
Net Profit -
Calculation of total fixed expenses-
Particulars Amount
Advertising 3,12,000
Insurance 40,000
interest 80,250

REPORT 10
Total Fixed Expenses 4,32,250
Calculation of total Variable
expenses-
Particulars Amount
cost of sales 10,06,200
sales bonuses and
delivery 1,16,480
wages & others 5,55,485
bad debts 1,44,000
total variable expenses 18,22,165
Calculation of variable cost per
unit-
particulars Amount
Variable cost 18,22,165
Budgeted sale units 2000
variable cost per unit 911.08
Calculation of breakeven point in unit
Particulars Formula

REPORT 11
Breakeven point in unit Fixed cost/ Contribution per unit
Breakeven units 666
Calculation of
Units-
Particulars
Selling
price units
sales 2754415 1560
1765.65
1
less: variable
cost
18,22,16
5
contribution 932250
less: fixed cost 4,32,250
profit 500000

REPORT 12
References
Alexander, C. (2011). Market models: A guide to financial data analysis. USA: John Wiley &
Sons.
Bartram, S. M., Brown, G. W., & Fehle, F. R. (2019). International evidence on financial
derivatives usage. Financial management, 38(1), 185-206.
Bernstein, S., Lerner, J., Sorensen, M., & Strömberg, P. (2016). Private equity and industry
performance. Management Science, 63(4), 1198-1213.
Brammer, S., Brooks, C., & Pavelin, S. (2016). Corporate social performance and stock returns:
UK evidence from disaggregate measures. Financial management, 35(3), 97-116.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. UK: Cengage
Learning.
Caudron, C., White, R. S., Green, R. G., Woods, J., Ágústsdóttir, T., Donaldson, C.,&
Brandsdóttir, B. (2018). Seismic Amplitude Ratio Analysis of the 2014–2015 Bár
arbunga‐Holuhraun Dike Propagation and Eruption. Journal of Geophysical Research:
Solid Earth, 123(1), 264-276.
Datta, S., & Chakraborty, A. (2018). Industry Concentration and Stock Returns: Indian
Evidence. JIM QUEST, 14(1), 93.
Erasmus, S. W., Muller, M., van der Rijst, M., & Hoffman, L. C. (2016). Stable isotope ratio
analysis: A potential analytical tool for the authentication of South African lamb
meat. Food chemistry, 192, 997-1005.
Ferrer, R. C., & Ferrer, G. J. (2016). Earnings management indicators and their impact on
inventory turnover under food, beverage and tobacco sector: a thorough study using
simultaneous equations model. Academy of Accounting and Financial Studies
Journal, 20(2), 93.
Hançerlioğulları, G., Şen, A., & Aktunç, E. A. (2016). Demand uncertainty and inventory
turnover performance: An empirical analysis of the US retail industry. International
Journal of Physical Distribution & Logistics Management, 46(6/7), 681-708.
Hofstead-Duffy, A. M., Chen, D. J., Sun, S. G., & Tong, Y. J. (2012). Origin of the current peak
of negative scan in the cyclic voltammetry of methanol electro-oxidation on Pt-based
electrocatalysts: a revisit to the current ratio criterion. Journal of Materials
Chemistry, 22(11), 5205-5208.
Ihlanfeldt, K., & Mayock, T. (2016). The variance in foreclosure spillovers across neighborhood
types. Public Finance Review, 44(1), 80-108.

REPORT 13
Rodrigues, L., & Rodrigues, L. (2018). Economic-financial performance of the Brazilian
sugarcane energy industry: An empirical evaluation using financial ratio, cluster and
discriminant analysis. Biomass and bioenergy, 108, 289-296.
Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis.
Cambroidge: Cambridge University Press.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book
Chapters, 109-169.
Xia, F., Farmer, D. B., Lin, Y. M., & Avouris, P. (2016). Graphene field-effect transistors with
high on/off current ratio and large transport band gap at room temperature. Nano
letters, 10(2), 715-718.
Yanadori, Y., & Kato, T. (2017). Average employee tenure, voluntary turnover ratio, and labour
productivity: Evidence from Japanese firms. The International Journal of Human
Resource Management, 18(10), 1841-1857.

REPORT 14
Appendix
Requirement 1:
Calculation of financial ratios
Description Formul
a
smart computers Indu
stry
Ave
rage
s
2017 2018 201
9
2019
Profitability
Net margin Net
profit/re
venues
-3% 11% 25.
54
%
21.6
8%
Return on equity Net
profit/eq
uity
-2% 11% 48.
96
%
39.9
8%
Gross margin gross
profit/
Revenue
s
60% 62% 67.
75
%
64.0
0%
Liquidity
Current ratio Current
assets/cu
rrent
liabilitie
s
2.81 1.51
1.2
5
1.90
liquity Ratio Current
assets-
Inventor
y/current
liabilitie
s
2.06 1.08
0.9
3
1.15
Equity ratio Total
equity/
Total
assets
79% 68% 52
%
56.0
3%
Efficiency
inventory turnover (time per year) sales/
average
8 5
4 8

REPORT 15
inventor
y
inventory turnover (days) 360/
inventor
y
turnover
43.2 77.28 87 46
account receivables turnover days 365/
accounts
receivabl
e
turnover
102.2 189.8 243 41
account receivables turnover (times
per year)
sales/
average
accounts
receivabl
e
3.57 1.92 1.5
0
9.00