Financial Analysis Report: Sky Cafe Budget and Variance Analysis

This report provides a comprehensive financial analysis of Sky Cafe's budget, focusing on the month of July. It begins by outlining the objectives of budgeting for the company, including cash flow estimation, resource allocation, scenario modeling, and performance measurement. The report then delves into a detailed analysis of revenue and spending variances, comparing budgeted figures with actual results. Key variances are identified, such as unfavorable revenue variance due to lower sales volume and increased expenses in areas like insurance, fuel, and facility rent. The analysis explores the potential causes of these variances, considering market factors, pricing, and operational efficiency. Finally, the report offers recommendations to Sky Cafe's management to support its corporate objectives, including minimizing the selling price per unit and cutting production costs to improve financial performance and address the identified variances.

Running head: ACCOUNTS AND FINANCE
Accounts and Finance
Name of the Student:
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Table of Contents
Introduction:....................................................................................................................................2
Requirement 1:.................................................................................................................................2
Requirement 2:.................................................................................................................................3
Requirement 3:.................................................................................................................................5
Requirement 4:.................................................................................................................................7
Conclusion:......................................................................................................................................7
References:......................................................................................................................................9

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Introduction:
In the current global competitive business environment, any organisation that does not
prepare budget paves the path for a number of financial issues. This idea holds good for all types
of business organisations irrespective of their sizes and ages (Armitage, Webb and Glynn 2016).
On the contrary, an organisation that establishes short-term and long-term business goals through
detailed business plan could develop a roadmap in order to ensure financial success and
expansion opportunities. Budgeting is a procedure involving a series of activities conducted for
preparing a budget. Thus, budget could be defined as a quantitative plan for determining the
activities to be selected for future. The paper would intend to explore the objectives of
developing budget for Sky Cafe. The next section would involve analysis of revenue variance as
well as spending variance of the organisation for July. The next segment would emphasise on
identifying those activity variances needing management concern. Finally, the paper would shed
light on providing recommendations to the organisation so that it could support its objectives
effectively.
Requirement 1:
Sky Cafe is a firm located near an airport engaged in preparing meals for the citizens and
tourists visiting the nation. Hence, it is crucial for the management of Sky Cafe in developing
budget by taking into consideration the following objectives:
Estimation of cash flows:
As Sky Cafe is assumed to be in the growing stage, budget is deemed to be valuable. This
is because the organisation is dependent on seasonal sales. Moreover, this type of organisation

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faces issues in predicting the amount of likely cash needed in future and this might result in
periodic cash crises (Ax and Greve 2017). With the help of budget, it becomes easy to estimate
cash flows, which is considered as a reasonable budgeting goal.
Allocation of resources:
Sky Cafe could use the budgeting process as a method for determining the areas, in which
the funds would be allocated to different activities like purchase of fixed assets. With the help of
a suitable objective, it needs to be combined with capacity constraint analysis for ascertaining the
areas of resource allocation (Fullerton, Kennedy and Widener 2014).
Modelling scenarios:
When there are a number of alternatives for any organisation, a set of budgets could be
created based on varied scenarios for predicting the financial outcomes of the strategic
directions. However, Sky Cafe need not be overly optimistic while inputting assumptions in the
budget model for avoiding unlikely outcomes.
Measurement of performance:
Sky Cafe could prepare budget for using the same as a base in order to judge staff
performance with the help of budgetary variances. However, constant monitoring is needed for
this objective, as the staffs try to alter budget by making their personal goals easy for
accomplishment (Langfield-Smith et al. 2017).

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Requirement 2:
In case of Sky Cafe, revenue and spending variance for the month of July is represented
briefly as follows:
Serial Number Particulars
Budgeted Actual
Per unit (in £) Total (in £) Total (in £)
1 Meals quantity 18,000 17,800
2 Revenues 4.50 81,000 80,100
Expenses:
3 Raw material 2.40 43,200 42,720
4 Wages and salaries 5,200+0.30q 10,600 10,540
5 Utilities 2,400+0.05q 3,300 3,290
6 Facility rent 4,300 5,100
7 Insurance 2,300 2,600
8 Fuel 2,480 2,490
9=3+4+5+6+7+8 Total expenses 66,180 66,740
10=2-9
Net operating
income 14,820 13,360
Table 1: Sky Cafe’s revenue and spending variance for the month of July
(Source: As created by author)
The above-stated table depicts both revenue variance and expense variance for the
organisation in July. It is evaluated from the case study that Sky Cafe has forecasted that in July,

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it would be able to sell 18,000 meals. There would not be any change in the selling price per
meal; however, the actual sales volume declined to 17,800 meals. Due to this, the revenue
generated has been lower by £900 compared to the estimated figure. This is considered to be the
revenue variance for the organisation. As remarked by Lavia López and Hiebl (2014), favourable
revenue variance takes place at the time actual revenues are more than budgeted revenues and
vice-versa in case of unfavourable revenue variance. The main reason that this variance occurs is
due to the difference between budgeted amount and actual selling prices, sales volume or a
combination of both.
Based on the provided information, it is evident that Sky Cafe has neither increased nor
decreased its actual selling price for each meal. However, the actual sales volume has fallen short
by 200 meals in comparison to the budgeted figures. As a result, an unfavourable revenue
variance of £900 could be observed in the month of July for the organisation.
In the words of Messner (2016), spending variance usually occurs due to the difference
between the expectations of the management in paying for a product and the amount actually
incurred for that product. However, it is to be borne in mind that the actual expenses rarely
match with the forecasted expenses identically. There always remains a slight variance between
the estimated figure and the actual figure. In case of Sky Cafe, the estimated spending figure has
been lower than the actual spending figure by £560. This is not favourable for the organisation,
as it has to incur higher amounts for maintaining its business expenses. Moreover, the revenue
margin for the month has fallen as well and hence, the situation has worsened further for Sky
Cafe in the same month.

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Requirement 3:
There are certain activities identified having unfavourable variances and these activities
require proper management concern in the context of Safe. They are explained briefly as follows:
As evaluated in the previous section, actual revenue for Sky Cafe is lower than the
budgeted revenue by £900. The main reason that revenue has declined for the organisation is due
to the market factor. There are situations when an organisation plans out all moves and there
could be an abrupt shift in the market resulting in loss of sales or sales transposition, since the
customers start preferring a feature or product over another (Otley 2016). In case of Sky Cafe, as
the organisation is mainly dependent on the tourists for revenue generation, a sudden seasonal
change might have lead to fall in overall sales revenue.
Another area of concern is insurance expense, in which Sky Cafe has actually incurred
£2,600, which is £300 more than the budgeted figure. The reason identified behind such increase
in this expense item is that the organisation might not have settled a part of its insurance expense
in the past month due to which the actual amount has exceeded the budgeted amount.
Fuel is another item, in which the actual expense incurred has exceeded the budgeted
expense by £10. The cost of fuel increases with change in governmental policy, as the relevant
authority sets the fuel price of the nation (Shields 2015). In case of Sky Cafe, the fuel price
estimation was not made correctly, as the estimator might have failed to anticipate the sudden
rise in fuel price. As a result, the management of Sky Cafe has to bear additional expenses for
this item.
Finally, facility rent is deemed to be the final expense item having adverse variance in the
context of Sky Cafe. The facility rent is observed to exceed the budgeted amount by £800. The

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reason is that the organisation might have leased additional equipment due to the fact that it has
overestimated its sales volume for the month of July (Smith 2017). The rental expense has
increased compared to the budgeted one and as a result, Sky Cafe has to incur additional overall
expense of £1,460 compared to the budgeted figure.
Requirement 4:
After identification of the adverse variances for Sky Cafe, it is recommended to the
organisation to undertake certain measures that would assist in supporting its corporate
objectives. These measures are described briefly as follows:
Minimisation in selling price per unit:
It has been analysed that Sky Cafe has not managed to meet its expected sales volume, as
per the budgeted figure. As the competitors are perceived to use similar selling price per unit
with additional features, the organisation could minimise its selling price per unit to £4 per meal.
This is because many tourists prefer to avail food meals at lower prices for saving money
(Thomas 2016). This needs to be supported by additional marketing efforts to provide prior
information to the potential customers.
Cutting production costs:
As Sky Cafe is unable to control its operating costs due to unavoidable external
conditions, it needs to minimise its production costs. This reduction would assist in offsetting the
increased operating expense for the organisation (Van Der Stede 2016).

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Conclusion:
From the above discussion, it is inherent that the objective of preparing budget for Sky
Cafe is to allocate resources effectively along with appropriate estimation of market conditions.
When the budgeted expenses and revenue are compared with the actual expenses and revenue,
both revenue and spending variance are found to be adverse. The activities that need
management attention include revenue, insurance, fuel and facility rent. Hence, for combating
with these problems, it is advised to the management of Sky Cafe to minimise its selling price
per unit as well as production cost for increasing revenue and offsetting increase in operating
costs.

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References:
Armitage, H.M., Webb, A. and Glynn, J., 2016. The use of management accounting techniques
by small and medium‐sized enterprises: a field study of Canadian and Australian
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Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting practices. Journal of
Operations Management, 32(7-8), pp.414-428.
Langfield-Smith, K., Smith, D., Andon, P., Hilton, R. and Thorne, H., 2017. Management
accounting: Information for creating and managing value. McGraw-Hill Education Australia.
Lavia López, O. and Hiebl, M.R., 2014. Management accounting in small and medium-sized
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Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, pp.45-62.

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Smith, S.S., 2017. Strategic Management Accounting: Delivering Value in a Changing Business
Environment Through Integrated Reporting. Business Expert Press.
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