Budget Control and Variance Analysis

This case study explores the concept of budget control, breakeven point, margin of safety, and variance analysis. It explains the different types of costs and their relevance to pricing decisions. It also provides calculations for material variance, labor rate variance, and fixed overhead expenditure variance. Additionally, it discusses the importance of preparing budgets to control operations.

CASE STUDY

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
1. Calculation of breakeven point and margin of safety..............................................................3
2. Calculation of profit with the technique of marginal costing and absorption costing.............5
PART B...........................................................................................................................................6
i) Demonstrate an understanding by explaining different types of costs and their relevance to
pricing decisions and the role of budget......................................................................................6
ii) Calculate all material variance, labor rate variance and fixed overhead expenditure variance
.....................................................................................................................................................8
iii) Prepare budgets to control operations....................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Budget control assumes that management has made a budget for all departments / units of the
enterprise and these budgets are summarized as a master budget. Budgetary control requires the
recording of actual performance, its continuous comparison with budgetary performance, and the
analysis of variations in terms of causes and responsibility. Budget control is a system that
suggests appropriate corrective action to prevent future deviations. A good budgeting system
should involve individuals at different levels while preparing the budget. Subordinates should
not accuse them of any kind. Budgetary control considers the existence of business enterprise
forecasts and plans. There should be proper determination of authority and responsibility.
Delegation of authority should be done appropriately. This project report consists of two parts; A
and B. First part covers the concept of breakeven point and margin of safety and second part
focuses on variance analyses.
PART A
1. Calculation of breakeven point and margin of safety
Breakeven point: The break-even point (BEP) in business — and especially cost accounting
— is the point at which total cost and total revenue are equal, i.e. "even". There is no net loss
or gain, and none is "broken", although the opportunity cost has been paid and the capital has
received a risk-adjusted, expected return. In short, all the costs paid are paid, and there is
neither profit nor loss.
The size of the degree of operation in which the revenue amount and the cost amount agree
with the entire enterprise or each division. That is, if the profit is greater than that, it means
the sales volume or production amount where the loss is recorded if it is less than or equal to
it. This is achieved by the intersection of profit and cost on the break-even point chart. A
guideline for preparing this short-term benefit plan; the calculation of breakeven point has
been done below:
Price per unit (£) Units Total (£)
Selling price per unit 24 140,000 £

3,360,000
Less: Variable cost per unit 18 140,000
£
2,520,000
Contribution 6 140,000
£
840,000
Less: Fixed costs
£
800,000
Net profit
£
40,000
Breakeven point (unit):
= Fixed Costs ÷ (Revenue per Unit – Variable Cost per Unit)
= £ 800,000 / £6
= 133,333.33
Breakeven point (Sales):
= BEP in units * Selling price per unit
= 133,333.33 * £24
= £ 3,200,000
Margin of safety: Calculating your contribution margin is important when pricing your
product. Contribution margin allows you to know how much you will earn per unit, and
allows you to know how much you can reduce the price of your product for sales or price
reduction. The formula for calculating your contribution margin percentage is: (Total
Revenue - Variable Cost) / Total Revenue. This figure allows a business to know what
percentage of their money is available to pay their fixed costs such as rent and payroll. Then
save is what can be understood as a company profit. Check our business terms on operating
costs and overhead to learn more.
Margin is the difference between the total value of securities held in an investor and the loan
amount from a broker. However, the term margin has many meanings, both in the business
stream and the finance stream, as well as in other situations. It can also mean that the revenue
from total sales exceeds the cost in a business. It can also refer to the difference between the
cost of a product and how much you sell it. Buying on margin is the act of borrowing money
to buy securities / assets. It involves purchasing a property where the buyer pays only one

percent of the property's value and borrows the rest from a broker or bank. The broker acts as
a lender and the securities act as collateral in the investor's account. Margin percentages for
Signs and FCA customers are generally estimated at 2%, 1%, or 0.5% or 50%, 20%, 10%,
5%, or 3.33% for CIMA customers.
To improve margin of safety; company can adopt following strategies:
 Do not exit product due to shortage of stock
 Compliance with deadline for customers, no problem to finish some items
 Continuous production or sales flow
 Stock area occupied in a balanced way
 Avoid immediate (and sometimes more expensive) purchases
Calculation of margin of safety has been done below:
Margin of safety in
pounds: Current sales – Breakeven sales
= £ 3,360,000 - £ 3,200,000
= £ 160,000
Margin of safety in units: Current sales units – Breakeven point
= 140,000 - 133,333.33
= 6666.67
Margin of safety in
percentage: 5%
2. Calculation of profit with the technique of marginal costing and absorption
costing
Profit calculation through Absorption costing
Particulars Price per unit Units Total (£) Total (£)
Sales £ 15
4,70
0
£
70,500
Less: Cost of sales
Direct material £ 4
4,80
0 £ 19,200
Direct labor £ 3
4,80
0 £ 14,400
Variable overhead £ 2 4,80 £ 9,600

0
Fixed overhead £ 3
4,80
0 £ 12,000
£ 55,200
Less: Closing Stock £ 12 100 £ 1,150
£
54,050
Gross Profit
£
16,450
Less: Operating
expenses - - - -
Net profit
£
16,450
Profit calculation through Marginal costing
Particulars Price per unit Units Total (£) Total (£)
Sales £ 15
4,70
0
£
70,500
Less: Cost of sales
Direct Material £ 4
4,80
0 £ 19,200
Direct Labor £ 3
4,80
0 £ 14,400
Variable Overhead £ 2
4,80
0 £ 9,600
£ 43,200
Less: Closing stock £ 9 100
£
900
£
42,300
Contribution
£
28,200
Less: Periodic cost
Fixed cost
£
12,000
Net Profit
£
16,200
PART B
i) Demonstrate an understanding by explaining different types of costs and
their relevance to pricing decisions and the role of budget
Costs: During the production of any item, the total amount spent on it is called cost. There are
many values like expenditure on raw materials, expenses on running the machine, salary of

employees, etc. The sum that is combined with all these expenses is called the cost of
production. There are many types of costs. The main differences are:
1. Direct costs: Costs that are related to a particular process or product. They are also called
traceable costs because we can find out what specific activity they are caused by. They may vary
with changes in activity or product. Direct costs include manufacturing costs related to
production, customer acquisition costs related to sales, etc.
2. Indirect cost: Indirect costs are the opposite of direct costs. We cannot ascertain this cost for
which particular activity or product it relates. We can also call these non-renewable costs. For
example, if income increases, then we have to pay more tax. We cannot find out what causes it.
3. Social costs: As we can know from the name itself, these costs are related to the society. These
costs are the value of compensation for losses incurred by various business activities. Or if a
business does some social work then it also comes into it. These include social resources for
which the firm does not pay any expenses but uses them, such as environment, water resources
and environmental pollution etc
4. Opportunity cost: Opportunity cost is also called alternative income. Suppose we have a
machine which has two uses. If we use it in one way, then we lose the benefit of using it in
another way. The profit lost using the second type is called opportunity cost.
5. Fixed cost: Fixed costs are costs that do not change with the scale of production. These costs
are levied on fixed means such as permanent employees, houses etc. Costs such as rent,
depreciation, salaries of permanent employees and interest on funds are all examples of fixed
costs.
6. Variable cost: Unlike fixed costs, variable costs are those costs that increase and decrease with
the scale of production. Costs such as electricity, water bills, raw material use, inventory and
transportation costs are examples of variable costs. We can see that there are resources such as
raw materials, electricity usage, etc., which increase production increases. Variable costs also
increase due to their increase.

7. Total fixed cost: In the short run, the total expenditure incurred by a firm on its fixed resources
for production is called total fixed cost. It does not change with increasing production and
remains constant. Hence, it has a ladder line in its curve. It is also called TFC.
8. Total variable cost: In the short run, the total expenditure incurred by a firm on its variable
resources in the production process is called total variable cost. It increases with increasing
production. So, when there is zero production, the variable cost is also zero. As production
increases it increases.
9. Total cost: In the short run, the sum of total fixed costs and total variable costs incurred by the
firm is called total cost. Total cost includes total fixed cost and total variable cost.
10. Average fixed cost: Average fixed cost or AFC means the fixed cost per unit of production.
This means that if we produce one thousand units and our total fixed cost is 1000, then the
average fixed cost will be 1 pound.
11. Marginal Cost: Marginal cost or Marginal Cost (MC) is the change in the total cost due to the
production of another unit. As production increases, the marginal cost increases.
12. Average Total Cost: Total Average Cost or Average Total Cost (ATC) means the total cost
incurred on every unit produced. It includes total fixed and total variable costs.
ii) Calculate all material variance, labor rate variance and fixed overhead
expenditure variance
Material Variance
Details Budgeted Actual Variance
Variance
%
Purchases units 3000 50000 -47000 -94.00%
Kilo per unit 0.5 0.5 0 0.00%
Cost per kilo
£
0.50
£
0.48 0.02 4.17%
Cost per unit
£
0.25
£
0.24 0.01 4.17%
Total cost
£
750
£
12,000 -11250 -93.75%
Labor rate Variance
Details Budgeted Actual Variance Variance

%
Total hours 4,030 4,000 30 0.75%
Hour per unit 1.3 1.3 0 0.00%
Cost per hour
£
8.00
£
6.92 1 15.56%
Cost per unit
£
10.40
£
9.00 1 15.56%
Total cost
£
41,912
£
36,000 5,912 16.42%
Fixed manufacturing overhead Variance
Details Budgeted Actual Variance
Variance
%
Fixed cost
£
24,180
£
25,000
-£
820 -3%
iii) Prepare budgets to control operations
Budget control:
Budgetary or budget control is the process of determining the various budgetary figures for
enterprises for future periods and then comparing the budgetary figures with the actual
performance to calculate the variances, if any. First, the budget is prepared and then the actual
results are recorded. Comparing budget and actual data will help management detect anomalies
and take remedial measures at the appropriate time.
Steps in controlling operational costs:
 Items are determined by preparing a budget.
 The business is divided into various responsibility centers to prepare different budgets.
 Actual figures are recorded.
 Budget and actual data are compared to study the performance of different cost centers.
 If the actual performance is below the budget criteria, immediate action is taken.

CONCLUSION
Hence, after analysis of whole report it can be concluded that a budget is a plan of policy to be
adopted during a set period of time to achieve a certain objective. Budgetary control will force
management at all levels to plan all activities that will take place during future periods.
Budgetary control coordinates the various activities of the firm and secures the cooperation of all
concerned so as to successfully achieve the general objective of the firm. This forces the officers
to think and think as a group. It coordinates macroeconomic trends and the economic condition
of an enterprise. It is also helpful in coordination of policies, plans and actions.

REFERENCES
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