Variance Analysis for Twin Rivers Cafe

This document discusses the variance analysis for Twin Rivers Cafe, focusing on the revenue and spending variances for July. It explains the objectives of preparing a budget for the cafe and the measures to support those objectives. The document also highlights the activities of concern in variance to the management and suggests measures to improve the financial performance of the cafe. Overall, it provides insights into the financial management of Twin Rivers Cafe.

FINANCE PROJECT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
a) Objective of preparing budget for Twin River Cafe ...............................................................1
b) Report showing revenue and spendings variances for July.....................................................2
c) Activity of concern in variance to the management................................................................3
d.) Measures for supporting the objectives of Twin Rivers Cafe ...............................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial accounting helps company to record all the transactions to know the
performance of company in a given period. It helps company to assess the health and financial
position. The management and outside users make decisions using the financial report of
company. Twin Rivers Cafe wants to identify the variances in it actual and budgeted figures.
a) Objective of preparing budget for Twin River Cafe
Companies go through budgeting process to design, implement and operate budget. It is a
managerial process of planning and preparing budgetary controls and related procedures. Process
of budgeting is referred at highest level in terms of future accounting indicating definite course
of actions and not just reporting(Hernandez, Jonker and Kosse, 2017).
Twin River prepares the budgets for the following objectives.
Providing Structure
Budgets give cafe the direction in which it is supposed to move ahead and enables the
management in planning further course of action. Budget helps the cafe to proceed towards a
particular direction giving it a sense of direction to follow. Budget provide structure to be
followed by organisations. The structuring helps the cafe to prioritise the activities that are
important for cafe.
Cash Flow predictions
Budgets are useful for cafes that are having irregular sales. Cafe have to spend the
considerable amount of time in making estimates for the cash requirements during the term. The
estimation is important for enabling the cafe to avoid the cash related transactions. Budgeting
gives a idea about the yearly cash flows for the cafe.
Allocating Resources
Budgeting helps cafe in proper resource allocation to various activities. It provide the
cafe to decide whether to allocate funds over a particular activity or not. For smooth flow of
operation it is important that activities are allocated with required funds and resources (Diao,
Sarkar and Jan, 2016.
Measuring performance
Performance also helps in measuring performance of the cafe with actual expenses with
that of the budgets. The variances in budget are essential for the cafe to ensure that actual
1

expenses are near the budgeted figures. High variances would reflect inability of company to
achieve its budgeted figures.
b) Report showing revenue and spendings variances for July.
Cost Type Budget Actual Variance A/F
Variance as
% of Budget
Meals
Quantity 18000 17800 200
Revenues 81000 80100 900 F 1.11%
Direct
Materials 43200 42720 480 F 1.11%
Direct Labour 10600 10540 60 F 0.57%
Utilities 3300 3290 10 F 0.30%
Facility Rent 4300 5100 -800 A -18.60%
Insurance 2300 2600 -300 A -13.04%
Fuel 2480 2490 -10 A -0.40%
Net Operating
Income 14820 13360 1460 9.85%
Twin Cafe is a coffee house that is serving meals for citizens and tourists near local
airport. The budgets are prepared by the cafe so that it could have planed structure to be followed
during the year with proper allocation of resources over activities. It also enable cafe to measure
the variances that have occurred between the actual and planned revenues and expenditures. For
the month of July. Variance analysis is important for the companies to frame new strategies and
policies for reducing the variances between the actual and budgeted figures. In the case of Twin
River Cafe company have expected a budgeted sales of 18000 q and against the budgeted figures
it achieved the actual levels of 17800 q. The variance between planned and actual revenues is not
high that shows that cafes has even sales during the month of July. For further increasing the
profits it should take promotions strategies and measures for increasing the sales of cafe. The
variances are not high from the budgeted figures (DeFranco and Schmidgall, 2017). This shows
the forecast of cafe is near to accurate.
Variance in direct materials is 1.11% that is seen because of change in sales level.
Increase is seen in direct wages as it has increased by £0.30 q., but the variances are only 0.57%
from the budgeted figures. Utilities if company has shown considerably low variations of only
0.30% even when it has increased by £0.05 q. Major variance are seen in rent and insurance.
2

Rent of the cafe outlet has increased by the owner that disturbed the budget of cafe. Rents are
increased after the rise in inflation in economy. Rents should be controlled to the level as further
increase can increase the cost of product. Also the insurance charges are increased as cafe took
new insurance cover the goods in transit after the loss faced in transit in previous months the
variance is of £300 in rent and of £800 in insurance that aggregates to £1100. Variance in
budgeted and actual profit is of 1460 and 9.85 in terms of percentage (Eton, Fabianm and
Benard, 2018). Profit variation is high in the cafe as the sales have not shown a favourable
variance. Rent and Insurance mainly dragged the profit of the company down with variance of
9.85 % from planned.
c) Activity of concern in variance to the management.
Variance analysis refers to deviations between actual and budgeted figures in financial
performance of company. Difference between budgeted and actual outcome are analysed for
showing the areas that are to be improved by the organisation. It also sometimes represent
unrealistic budgets that are required to be revised. Variance analysis helps Cafe in identifying
reason behind the variations in income & expenses of given period from the budgeted values.
The fluctuations occurring in variances are to be resolved by cafe for properly operating the
business. In the present case of Twin River Cafe the variations between the budgeted revenues
are not high the variance is only 1.11%.Variance of 9.85% in profits of cafe for the month of
July is considerably high against the change in revenues. Budgeted expense are against the sales
revenues of 18000 q therefore the variance are favourable. If they are calculated as against
actual figures of 17800 than the variance would have been adverse. Taking higher budgets
helped the company to have positive variance even after rise in prices of material and labour.
The profitability of company has gone down by £1460 that is very high in comparison to
its budgeted profit levels at the 18000 q. The variations are there mainly because of the rise in
operating expenses of company. The direct expenses had increased of company as against the
budgeted levels but the variances are favourable as company made the budgets were high. Major
variances are seen in the rent of cafe house (Paulus and et.al., 2017). The increase of £800 laid a
significant influence over the budgeted forecast. Increase of 18% is high and business had to bear
the cost of rent. Other increase and variance that affected significantly the budgeted figures is
insurance. Cafe for the coffee house and goods in transmit took a new insurance cover.
3

Cafe suffered loss in month of April and May of goods that were in transit that were not
covered by insurance. The insurance was essential but was not included in budget. The budgets
are prepared over estimations therefore the variations occur in the planned and budgeted figures.
Even after having the rise in rent and insurance cafe managed to remain profitable. Cafe has
managed successfully to manage the operational activities of Cafe. Fuel charges have not shown
a significant variation in budget. Measures should be taken by the management to increase the
efficiency of employees as charges have raised and prices of material have raised. Rent and
insurance are related to the external factors that cannot be controlled by management therefore
major area of concern is raw materials, wages and salaries and the utilities. These activities could
be controlled by organisation (Tan and et.al., 2016).
d.) Measures for supporting the objectives of Twin Rivers Cafe
Every business is established with the motive of earning profits and to achieve its desired
objectives. The objectives would be achieved only if the the variance between the budgeted and
planed figures are not high. In the case of Twin Cafe variations are seen majorly in rent and
insurance but these variance are not seen in every period. These are fixed expenses that do not
exceed every time therefore the main focus is over variable expenses (Unsworth, 2015). Cafe has
to search that could provide the same quality of raw materials at reduced prices. Cafe could ask
for cash discount from suppliers by making them early payments.
It could also make bulk purchases of the raw materials from supplies that will enable it to
bargain over the prices. Other increased factors are wages and utilities that are required to be
controlled by the organisations. This could be controlled by outsourcing some of the activities of
cafe. Outsourcing activities helps in controlling significant costs of the factors. These will help in
reducing the direct costs and managing the operations of business and keeping the cost within
control(Desai and et.al., 2018). Cafe regarding the rent and insurance should ensure that the rent
charges of the cafe do not rise further and insurance premiums over activities cover could be
reduced using other security measures.
4

REFERENCES
Books and Journals
Hernandez, L., Jonker, N. and Kosse, A., 2017. Cash versus debit card: the role of budget
control. Journal of Consumer Affairs.51(1). pp.91-112.
Diao, Y., Sarkar, R. and Jan, E.E., 2016, April. Optimizing ATM cash flow network
management. In NOMS 2016-2016 IEEE/IFIP Network Operations and Management
Symposium (pp. 1073-1078). IEEE.
DeFranco, A.L. and Schmidgall, R.S., 2017. Cash Budgets, Controls, and Management in
Clubs. The Journal of Hospitality Financial Management, 25(2), pp.112-122.
Eton, M., Fabian, M. and Benard, P.O., 2018. Cash Budgeting and Organizational Performance
of Private Firms in Uganda: A Case of Kabale District, Western Uganda.
Paulus, M.P. and et.al., 2017. Latent variable analysis of positive and negative valence
processing focused on symptom and behavioral units of analysis in mood and anxiety
disorders. Journal of affective disorders.216.pp.17-29.
Tan, H.E. and et.al., 2016. Type I tympanoplasty meta-analysis: a single variable
analysis. Otology & Neurotolog. 37(7).pp.838-846.
5

Harris, S. and et.al., 2018. Impact on mortality of prompt admission to critical care for
deteriorating ward patients: an instrumental variable analysis using critical care bed
strain. Intensive care medicine.44(5).pp.606-615.
Unsworth, N., 2015. Consistency of attentional control as an important cognitive trait: A latent
variable analysis. Intelligence.49.pp.110-128.
Desai, R.J. and et.al., 2018. Association of osteoporosis medication use after hip fracture with
prevention of subsequent nonvertebral fractures: an instrumental variable analysis. JAMA
network open.1(3). pp.e180826-e180826.
Online
[Online]. Available through : <>.
[Online]. Available through : <>.
6