Budget Variance Analysis: DS Financial Services and JK Shoe Company

Desklib provides past papers and solved assignments for students. This report analyzes budgets and financial performance.

BUDGETS AND FINANCIAL PLANING
1

Task 3- Budget- Service Business
Part A
1. Calculation of total Productive Hours:
Particulars
Total number of days Available 260
Less: Public & Other Holidays (30)
Total working days 230
Number of Hours per day 6
Total productive hrs per staff 1,380
Number of productive staff 20
Total Productive Hrs Available with the company 27,600
2. Calculation of Average Charge Per Hour to customers
Particulars Amount ($)
Total expenses 4,032,772
Add: Budgeted profit 400,000
Total charge to Customers 4,432,772
Total Productive Hrs 27,600
Average Charge Per Hour 161
3.
Brief Profit & Loss Statement of DS Financial Services
Particulars Amount ($)
Sales 4,432,772
Less: Cost of Goods Sold -
Gross profit 4,432,772
Less: Expenses
Wages & Salaries (3,086,910)
Employee Expenses (617,382)
Commissions (100,000)
Travel (31,450)
Entertainment (12,580)
Motor Vehicle Expenses (105,000)
Stationery (7,000)
Rent (31,500)
Rates & Taxes (15,750)
2

Telephone (5,200)
Computer expenses (20,000)
Net Profit Before Tax 400,000
4. Calculation of Productive Hours to achieve breakeven position
Particulars Amount
Sales 4,432,772
Less: Variable Cost -
Contribution 4,432,772
Less: Fixed Cost (4,032,772)
Profit 400,000
Production Hrs 27,600
Breakeven point (In Hours) 25,109
It is given that the expenses are fixed, desired or committed which means that there is no variable
cost in the company thus the variable cost is taken to be NIL. The breakeven point is taken out
on the basis of production hours i.e. it signifies that the company would take 25109 hours to
achieve the breakeven position.
Part B
Variance between current charge rate and proposed budget rate is as follows:
Particulars Budgeted Actual Variance
Average Charge Per hour 161 140 -21
Factors or opportunities that are to be considered when reviewing the budget include:
 Making monitoring of budgets a priority
 Focusing on the main areas of the business or budgets
 Warning signs are not to be ignored as the same can be dangerous for the company in
long run
 Make a effective communication throughout the company and different departments
 Reviewing of budgets promptly and thoroughly through all the areas.
Thus it can be said that the reviewing of budgets are very important and any changes required
should be made in the budgets after reviewing the same.
3

Task 4- Monitoring Performance- Sales Variance
1. Introduction
This report is made to give a summary analysis of the Revenue Comparative Statement
for the 8 months prepared by the company. Also reasons for deviations in the variables
between the budgeted and actual performance is provided in the report.
JK Shoe Company has made the revenue comparative statement for the 8 months ended
28 Feb. 2014 stating the quantity, price and revenue generated from its products which
includes dress shoe, casual and boot shoes. Also the statement specifies the budget for the
full year and variance between actual and budgeted data. From the analysis of the report
it can be seen that the actual revenue of the company for dress shoe and casual shoes is
more than the budgeted revenue thus resulting in a positive variance. However the issue
of concern is the actual revenue of boot shoes which is way less than the budgeted
revenue thus causing negative variance. The variance for the boot shoes is negative to
such an extent that it is able to cover the positive variance of other two categories and
thus resulting in an overall negative variance of $ 980000. The negative variance for
revenue of boot shoes is as a result of negative variance of boot shoes average price and
quantity.
Conclusion
Thus to conclude it can be said that the company is having the negative variance of
budgeted v/s actual revenue due to the boot shoe category as the sales of the same is not
fulfilled as per the budgeted sales thus leading to negative variance.
2. Points or questions to raise to gain an understanding of the current performance v/s
budget i.e. reason for unfavorable variance of budgeted and actual revenue is as follows:
 Non consideration of outcomes other than financial outcomes
 Inaccuracy in making budgets
 Change in situation at the time of budget in comparison to actual
4

 Time period for budget forecast not relevant as budget only prepared for 9 months
but should have been prepared for the whole year
Thus to reduce the variance between the budgeted and actual revenue in future the
company should consider the above factors and incorporate the same in the budgets to be
prepared in future. Also budgets should be prepared for the whole year rather than for 9
months.
3. Forecasting can be defined as prediction of the outcomes in future taking the past and
present information into consideration. Also information relating to future which could
affect the forecasting decision should be considered while forecasting. Forecasting is
important for the whole year as it gives an overview of the whole year and planning is
done for the whole year based on the same. If the forecast is not prepared for the whole
year then the same has be prepared again and again until the year is completed. Also
changes relating to the forecasts are to be made frequently as per the change in conditions
during the whole year every time new forecast for the period is prepared. Impact of
several factors in development of forecast for remaining 4 months is as follows:
a. Competitor behavior – if the competition is more and competitors are adopting
various different strategies then forecast for the remaining 4 months are made
keeping in mind the steps taken by competitors.
b. Economic data- Economic data pays a vital role in forecasting. If the economic
position in the market is favorable then forecast is made accordingly and vice
versa.
c. Advertising Expenditure- Advertising expenditure is an important factor while
developing budgets and forecasts as the same is directly proportional to the sales
of the company. As it can be seen that the company is having an unfavorable sales
variance thus to avoid the variance company should incur advertising expenditure
making it an important element in forecasting for next 4 months.
d. Seasonal Factors- Reason for unfavorable variance might have been seasonal
sales. If the season for sale of product is favorable then forecast is made on the
basis of the same.
5

4. Company should communicate the counter measures and steps made to achieve the
projected data clearly for all the departments and employees by way of personal, verbal
and written communication. Company should assure that the plan has been
communicated to all the staff and the employees have gained clear understanding of the
same. If there is any problems in understanding the same steps should be taken to give
support to the employees. Company should take continuous measures to monitor the
steps and motivate the employees of the company to achieve the desired objectives and
counter measures by way of incentives and commissions on achieving the desired
objectives.
6

Task 5- Monitoring Performance- Financial Analysis
Indicator Actua
l
Budge
t
Varianc
e
Impact and
possible
causes of
Variance
Possible Countermeasures for
the remainder of the period
Gross
Profit % of
Sales
30.4% 34.2% -3.7%
Variance in
gross profit
% to sales is
due to
reduction in
revenue of
boot shoes in
comparison
to budgeted
revenue.
Also due to
this gross
profit is
reduced
from the
budgeted
data
Increase sales of boot shoes by
adopting several measures like
advertising, adopting new
promotion measures, reducing
cost etc.
Expenses
as a % of
Sales
10.7% 10.8% 0.2% Expenses for
the period
has been
lower in
comparison
to the
budgeted
expense but
the sales has
reduced to a
great extent
in
comparison
to the
budgeted
thus causing
a slight
variance in
the total
expense % to
There is a slight variance in the
expense as compared to budget.
So there is a scope of increasing
expenses slightly which could
help in increasing sales of the
company. Thus company should
incur expenses which are helps in
increasing sales like sales and
distribution expenses.
7

sales
Net Profit
% of Sales
Ratio
13.8% 16.3% -2.5%
Reason for
variance of
net profit %
is because of
the decline
in the actual
sales of the
boot shoes
from the
budgeted.
Even though
the expenses
are reducing
but the sales
have fallen
drastically
thus causing
the variance
Net profit % can be increased and
brought in equality with budgeted
by reducing the expenses if
possible and increasing the sales
specially sales of boot shoes
which is much lower in actual
than the budgeted.
Return on
Investment
%
36.1% 45.0% -8.9%
Variance in
Return on
investment is
due to net
profit. The
net profit of
the company
was much
lower than
the budgeted
net profit.
Also this
effects the
capital
injection of
the company
thus
effecting and
leading to
negative
variance in
ROI
Return on investment can be
improved by conducting analysis
of the expenses and increasing the
net profit of the company by
adopting measures like cost
cutting, increase in sales etc.
Current
Ratio -
show as
ratio e.g
2:1
2.3 3.1 -0.8
Current
Ratio is the
measure of
current
assets in
To bring the current ratio to the
budgeted level the company
should try n increase the current
assets of the company. Also
current liabilities of the company
8

comparison
to current
liabilities.
The current
assets in the
company has
increased as
compared to
budgeted,
however the
should be reduced and brought to
the budgeted level. Company
should defer the payment of trade
payables to reduce the current
liabilities of the budgeted level.
0.7 1.7 -1.0
Quick ratio
is similar to
current ratio
except the
current asset
is reduced by
inventory
while
calculating
quick ratio.
There has
been a
negative
variance of
quick ratio
due to
increase of
actual
current
liability in
comparison
to budgeted
leading to
negative
variance
In future to improve the quick
ratio company should try and
reduce the current liabilities
particularly accounts payable as
the same is much more than the
budgeted amount. To reduce the
same company should reduce its
credit purchases or defer the
payment to creditors.
Quick
Ratio
show as a
ratio e.g.
2:1
Stock
Turnover 0.6 0.3 0.3 There is a
positive
9

Express as
No. of
times e.g
1.5 times
variance in
the stock
turnover as
there is a
decrease in
the cost of
goods sold
of the
company in
comparison
to the
Average
Accounts
41 33 -9 It can be
seen that the
negative
variance of
average
debtor’s
collection
period is due
to actual
sales being
much lower
than the
budgeted
sales.
However the
average
debtors have
increased but
not in
comparison
to decrease
in sales thus
effecting the
average
debtors
To improve the average accounts
receivable collection period in the
coming period company should
appoint collectors and make
certain incentive schemes which
pays incentive to debtors on early
payments. This would help in
improvement of average collection
period which is very bad in
comparison to budgeted data.
Receivable
Collection
Period
Express as
no. of days
outstandin
g *
10

collection
11