Concept of Budget And Budgetary control Assignment

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Project Report: Accounts

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Contents
Introduction.......................................................................................................................3
Objectives of budget preparation......................................................................................3
Revenue and spending variances......................................................................................4
Variance activity...............................................................................................................5
Recommendation..............................................................................................................6
Conclusion........................................................................................................................6
References.........................................................................................................................8

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Introduction:
Budgetary control is a system of management control that focuses on the spending
and actual income of the business in order to compare the planned income and expenses of
the business so that the forecasting of the business could be done and the better strategies
could be prepared for the betterment of the business (Madura, 2011). In this report, the case
of sky cafe has been studied in order to recognize the objectives of the budget preparation
along with the study of the variance analysis. On the basis of the report, it has been
recommended to the managers of Sky cafe that how could variances analysis help the
business to meet the main objectives of the business.
Objectives of budget preparation:
Almost all of the companies use the budgetary process in order to manage the
performance of the business and forecast the future performance of the company in order to
set, manage and alter the strategies of the business for the betterment of the company. The
budgetary process of a business is quite easier (Rabin, 2013). The main objectives of sky cafe
behind the budget preparation are as follows:
Provide structure:
A budgetary control is especially useful in Sky cafe in order to offer the guidance
about the direction and the current performance of the business so that the objectives of the
business could be met. It basically forms a basic structure for the employees of the Sky cafe
which must be followed by everyone so that the main goal of the business could be achieved.
A budget only offers the significant amount of structure to the management which is used by
them constantly in order to judge the people and meet the expectation line of the business
(Higgins, 2012).
Predict the cash flows:
A budgetary report is extremely useful for the Sky cafe and its managers to identify
the future income and expenses of the business so that the cash flows of the business could be
forecasted. It takes the concern on the seasonal sales, irregular sales pattern etc to measure
the required cash in the business. It explains that budget is quite important in a business in
order to forecast the future cash flows of the business and identify the required level of cash
in the business.

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Allocate the resources:
Budgetary reports are prepared by each of the company for different perspective. Sky
cafe prepare the budgetary report in order to measure that which funds must be allocate to
which activity so that the common goal of the business could be met. Budgeting process is a
tool to decide where the funds must be allocated to which of the activity such as purchase of
fixed assets, the budgetary reports are combined with the constraint analysis capacity so that
the better allocation of the resources could be done (Porcelli & Delgado, 2009).
Model scenarios:
Budgets are prepared by the sky cafe in order to prepare a scenario about the future
performance of the business. It identifies that how much revenues would be generated by the
business and on the basis of the revenues, the spending plan is also created by the business.
The business cerates the different scenarios on the basis of various variables such as sales
unit, sales price per unit etc. so that the strategic direction could be prepared and the business
become able to meet the common goal of the business.
Measure the performance:
The most common objective of the budget preparation is to use the basis in order to
measure the performance of the Sky cafe and judge the performance of the employees
through the help of variance analysis. The measurement of performance makes it quite simple
for the business to meet the common goal of the business and improve the overall
performance of the company (Rose & Hudgins, 2012).
It explains that the budgetary reports are quite useful for the Sky cafe to maintain
measure and improve the overall position of the business and meet the common goal of the
business.
Revenue and spending variances:
On the basis of the given case, the variance analysis study has been done on the
revenues and expenses of the business. Variance analysis is the quantitative investigation on
the actual and planned behaviour of the business. The analysis is used by the businesses to
maintain the control over the business and improve the overall performance of the business.
The spending and revenue variances of the business are as follows:
Cost Sheet

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Budgeted Actual Variances
Favourable /
Unfavourable
P.U. Total cost P.U. Total cost
Sales Quantity 18000 17800 200 U
Revenues
£
4.50 £ 81,000.00
£
4.50 £ 80,100.00 -£ 900.00 U
Expenses
Raw material
£
2.40 £ 43,200.00
£
2.40 £ 42,720.00 -£ 480.00 U
Wages and
salaries
£
0.30 £ 5,400.00
£
0.30 £ 5,340.00 -£ 60.00 U
Utilities
£
0.05 £ 900.00
£
0.05 £ 890.00 -£ 10.00 U
Wages and
salaries £ 5,200.00 £ 5,200.00 £ -
Utilities £ 2,400.00 £ 2,400.00 £ -
Facility rent £ 4,300.00 £ 5,100.00 £ 800.00 F
Insurance £ 2,300.00 £ 2,600.00 £ 300.00 F
Fuel £ 2,480.00 £ 2,490.00 £ 10.00 F
Total expenses £ 66,180.00 £ 66,740.00 £ 560.00 F
Net operating
income £ 14,820.00 £ 13,360.00 -£ 1,460.00 U
The above table represents that the various changes have taken place in the
organization from the planned behaviour to the actual behaviour. The changes have taken
place in the business because of the various internal and external changes in the organization.
In terms of the sales quantity, it has been recognized that the expected volume of sales was
18000 units whereas only 17800 units have been sold by the business which represents that
there were unfavourable variance in the sales quantity of the business.
Further, the sales revenue and total expenses of the business have been studied and it
has been found that the performance of the business is unfavourable which has impacted on
the net operating income level of the business as well. It defines that the sales quantity and
the fixed expenses have affected more on the net operating income level of the business. The
variance analysis study represents that the budget prepare must done the depth analysis in
order to prepare the reports so that the level if variance could be reduced and business
become successful to meet the common goal of the business (Chandra, 2011).
Variance activity:

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On the basis of the variance analysis on Sky cafe, it has been recognized that the
management should concern about the level of activity which has been fell below than the
actual planned activity for the month. it has been recognized that the company has expected
that the volume of sales of the company would be 18000 units whereas only 17800 units have
been sold by the business which must be the main concern of the business and the
management, management should evaluate that why the sales level of the company has been
reduced than the expected level (Koropp, Kellermanns, Grichnik & Stanley, 2014).
Further, the unfavourable variances in the expenses must also be taken care by the
management in order to identify the factors where the cost of the business has been improved
than the expected level and affected the overall level of the net profit of the business. Due to
these factors, the net profitability level of the business has been reduced to £ 1,460.00 than
the expected net operating income level of the business.
Recommendation:
Through the analysis on the Sky cafe management plan, planned behaviour and actual
behaviour, it has been evaluated that various changes have affected the actual behaviour of
the business and because of that the net operating income level of the business has been
reduced. The management of Sky Cafe is recommended to make few changes into its internal
policies so that the common goal of the business could be met. Some of the required changes
in the business are as follows:
 The business should monitor the activities of the business on regular basis.
 Better relation must be maintained by the suppliers so that the cost could be reduced.
 The marketing strategies must be strong so that the planned sales units could be sold
by the business.
 A better structure must be prepared by the management for the employees so that
every employee could know his responsibilities and help the business to meet the
common goal (Banes, 2007).
 Measurement tools must be applied by the management in the company so that the
overall performance of the business could be improved (DemaMoreno, 2009).
Conclusion:

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To conclude, the budgetary reports and the variance analysis play crucial role in an
organization in order to monitor the current performance and forecast the future performance
level of the business so that the better direction plan could be prepared and the business could
meet the common goal of the business.

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References:
Barnes, P. (2007), The Analysis and Use of Financial Ratios: A Review Article, Journal of
Business Finance & Accounting, 14 (4), p. 449-461
Chandra, P. (2011). Financial management. Tata McGraw-Hill Education.
DemaMoreno, S. (2009). Behind the negotiations: Financial decision-making processes in
Spanish dual-income couples. Feminist Economics, 15(1), 27-56.
Higgins, R. C. (2012). Analysis for marketing management. McGraw-Hill/Irwin.
Koropp, C., Kellermanns, F. W., Grichnik, D., & Stanley, L. (2014). Financial decision
making in family firms: An adaptation of the theory of planned behavior. Family
Business Review, 27(4), 307-327.
Madura, J. (2011). International financial management. Cengage Learning.
Porcelli, A. J., & Delgado, M. R. (2009). Acute stress modulates risk taking in financial
decision making. Psychological Science, 20(3), 278-283.
Rabin, M. (2013). Risk aversion and expected-utility theory: A calibration theorem.
In Handbook of the Fundamentals of Financial Decision Making: Part I (pp. 241-252).
Rose, P. S., & Hudgins, S. C. (2012). Bank management & financial services. McGraw-Hill
Education.