Amana Ltd: Budget Variance Analysis and E-commerce Decision Making

This management accounting report provides a detailed analysis of Amana Ltd's financial performance, focusing on budget variances and strategic recommendations. The report begins by calculating a monthly control report, highlighting original budgets, flexible budgets, and variances. It then examines Amana Ltd's performance for the financial year 2019-20, based on the control report, and suggests improvements for the CEO, including continuous performance management and risk management planning. Furthermore, the report evaluates Mr. Amana's decision to utilize online websites, comparing the costs and benefits of establishing an independent online shop versus trading with Amazon. The analysis considers factors such as control, competition, cost, and confidentiality, ultimately providing a comprehensive overview of Amana Ltd's financial position and strategic options.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
1. Calculation of the monthly control report which displays the budget of flexible, original,
variances......................................................................................................................................3
2. Observe the performance or action of Amana Limited for the financial year 2019-20 with
the help of the control report organised above............................................................................5
3. Suggest the CEO of Amana Ltd. with a better path for their business....................................7
PART B...........................................................................................................................................8
1. Present and examine the decision of Mr. Amana' of using the online websites and talk about
the settlement of own online shop or trade with Amazon in consideration with the total costs. 8
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is the subject in which the managers of an organisation utilise
the financial data and the accounting information available through the business for the purpose
of decision making. It also assists the business management to assists tin the business control
function and their respective performance. A budget whereas is an approximation of the revenues
and expenses that the business will incur in a future period of time which is decided in advance
and then is frequently checked upon (Ahmed, 2018). In this report, a case study of Amana
Limited is given which involves a brief explanation of various terms relating to budgets and
control report are explained. Along with this some recommendations are provided to the
organisation of Amana Limited for improving their results by focussing upon the variations
which occurred in their budgets.
PART A
1. Calculation of the monthly control report which displays the budget of flexible, original,
variances.
 Control report: A control report conceptualizes the data with the use of standard
deviations to display statistical likelihood and pick out the outliers. It showcases the data
as a sequence of connected points. The data in the business is visualized over a period of
time with the assistance of essential criteria set by the business organisation. There are
two different characteristics of a control report: the first characteristic includes dealing
with the particular performance of the individuals. It evaluates the performance of the
managers and lenders of all the different accountability centres with the standard of the
performance set by the business measuring the deviations (Eldenburg and et.al., 2020).
The second characteristic deals with the business performance of the responsibility
centres in the economic terms and measures the deviation that occur.
 Original budget: It refers to the detailed, onward looking budget which is the most
initial form of budget approved for the budget period. It showcases the profit and loss
statements, cash flow statements and the balance sheet of the organisation as well as the
written assumptions for the budget. With the help of original budget, the businesses can
evaluate and analyse their performances for the purpose of weighing the profits of the
business for future time periods. It even considers the differences between static budget

and the real potential of the business for incurring the expenditures and generating the
income.
 Flexible budget: A flexible budget is a form of budget which can be adjusted according
to the needs and requirements of the business and on the basis of the actual activity levels
which takes place in the business organisation (Gomez-Conde, Lunkes and Rosa, 2019).
A flexible budget is available for any customizations which take place as and when the
production of the business changes as per the previously decided output. It mainly
includes the variable costs which are flexible to fluctuations with the variation in the
output levels unlike a fixed budget which has fixed costs not depending upon the output
levels. The primary objective of preparing the flexible budgets is that it provides
assistance to the management in a business organisation to effortlessly make the required
changes which take place as and when the output changes which then shows variations in
the income and expense levels.
 Budget variance: It is a form of an accounting term that defines the circumstances in
which the actual expenditures of a business is in variation with the standard cost of the
expense projected by the management earlier. The causes for differences in the budgets
can be external or internal to the business. A negative variance in the budget displays that
either the business has exceeded the expense amount or the revenue generated from the
business has short fall of the expected number (Hoozée and Mitchell, 2018). A positive
variance occurs when the business earns revenue better than the expected results or the
costs incurred are lower than the expected numbers.

The monthly budget control report of Amana Ltd. is provided below:
AMANA LTD
Monthly Control Report
Particulars
Original
budget (£)
Actual (£)
Variances Variance (%)
Revenue 2500000 1600000 -900000 -36.00%
Less: Cost of Goods Sold 800000 840000 -40000 -5.00%
Raw Material 250000 280000 -30000 -12.00%
Direct labor 400000 440000 -40000 -10.00%
Overheads 150000 120000 30000 20.00%
Gross Profit 1700000 760000 -940000 -55.29%
Less: Non- operating / Fixed
Expenses
350000 305000 45000 12.86%
Warehouse rental 200000 170000 30000 15.00%
Insurance 100000 100000 0 0.00%
Full time Warehouse Supervisor
salary
50000 35000 15000 30.00%
Net Profit 1350000 455000 -895000 -66.30%
2. Observe the performance or action of Amana Limited for the financial year 2019-20 with the
help of the control report organised above.
These are the different steps that can be employed by Amana Ltd. as an organisation for
improving their results as extracted from the analysis of its control report:

1. Evaluate the additional expenditure part: The management at Amana Limited should
analyse the budget report and the other financial reports of the company in order to search
for all such areas which are generating excess expenditure in comparison to the budgeted
expense figures (Hui, 2019). This will assist the business of Amana limited to eliminate all
the additional expenses being incurred by the business and also to keep a check on the
activities so that the business keeps on generating effective costs from its operations.
2. Generate efficiency from product creation: There are various ways in which the business
can work upon improving or increasing its year end profits from its activities. One of the
ways is to generate product creation efficiency which means that the company focuses upon
creating the business products in an efficient manner by reducing the costs involved in the
production. An effective strategy involving the best suited placement of all the production
systems along with the necessary production resources can help the company to reduce its
costs involved in the production. Amana Ltd should intent upon substituting the incompetent
and unproductive production and professional systems that incur heavy costs with some
appropriate and effectual systems which assist the establishment to upsurge its financial
profits to develop exponentially.
Analysis for Amana Ltd.'s budget report is presented below. The flexible budget displays decrease in the business trade with respect to the actual
budget. This demonstrates that the business should target upon expanding its selling
charges as well as ensuring that revenue units of the business are not getting lowered due
to the increase in the selling costs (Jermias, Gani and Juliana, 2018). It will provide
Amana limited with the backing it needs for aiming to achieve profit maximisation in the
respective accounting year. The rate of selling the articles as per the budgeted cost is £25 and budgeted units for
being retailed in the market are 100000 units but in actual scenario the selling cost of
articles is £20 and the actual units retailed is 80000 as per the actual results. The income
generated hence is lower than the budgeted income and therefore the business of Amana
limited realised negative deviation for the budgeted standards. The company can hence
be affected with the high deviations in its cost.
 The variation that exist in the labour expense and raw material cost has also exceeded the
budgeted value. In the standard budget, the raw material and labour expenses were settled

at £250000 and £400000 correspondingly. But in the actual cost was £280000 and
£440000 which showed a difference of £30000 for the cost of raw material and £40000
for the costs involved in labour. There is a requirement of dealing with these variances
and Amana limited should hence emphasise upon exploiting the direct costs effectually
for the objective of profit maximisation (Kharlamova and et.al., 2020).
 The Gross profit of Amana limited is lesser with respect to the standards established by
the business as it displays a negative deviation of £940000 from the decided number of
gross profits which was assumed to be earned.
 The per unit costs of the labour can be reduced by a significant number by increasing the
overall business units being produced in the business as to provide per units cost
efficiency and hence increase the profit being earned on each unit by Amana limited.
3. Suggest the CEO of Amana Ltd. with a better path for their business.
 Manage execution towards objectives by utilizing Continuous Performance
Management.
The CEO should work upon utilizing the continuous performance management in the
business so that the performance of the individuals working in the business could be
measured on an ongoing basis and not in an annual or biannual system of performance
evaluation. This will assist the employees to be aware of the areas that they need to improve
their working in and know the skills which they lack.
 Create proper alignment of objectives across the company.
The CEO of the business should work properly on aligning the overall objectives across the
company as well as aligning the team objectives in the organisation so that it ensures the
effective appointment and application of the business strategies (Kreilkamp, Schmidt and
Wöhrmann, 2020).
 Ensure that every manager has weekly 1-on-1 meetings with all of his or her direct
reports.
This will help Amana limited to be aware of the performance of each and every employee in
the organization and the managers can hence adhere to this responsibility of having a weekly
one on one meetings along with direct reports. These meetings will assist the managers to

address the areas which need enough attention and understand the obstacles which are halting
the business progress.
 Guarantee proper risk management planning’s to be followed.
The CEO and the management of Amana limited should search upon the respective methods
and steps which can help business in performing risk management activities so that the
organisation is secure to any loss or future issues which the business might suffer and
therefore should be controlled with prior management.
PART B
1. Present and examine the decision of Mr. Amana' of using the online websites and talk about
the settlement of own online shop or trade with Amazon in consideration with the total
costs.
The analysis and evaluation of the two different options available to the CEO of Amana limited
is give below along with the benefits and drawbacks associated with the two different decisions
(Nishimura, 2019).
Option 1- If Mr. Amana contemplates selling on the company’s specific website, following
cost would be suffered.
Benefits of commencing personal website:
 It provides overall liberty and freedom regarding the control of the company to its owner
and hence no involvement of any type of subscription cost for dealing with the
company’s website.
 No competition involved to deal with on the private website of the business and therefore
no involvement of any reductions in the revenue generated.

 Mr. Amana can choose on their own all factors such as discounts, sale and price
reductions to provide on the website or not.
 There is no scope of any leakage in the confidential information’s of the business and
hence there is maintenance of enough secrecy of the company’s plans and future
prospects (Samuel, 2018).
Disadvantages of commencing personal website:
 Highly expensive when compared with selling the products on amazon.
 There is no such experience with which the company can start its own personal website.
 Shutting down the outlets of the company at major locations may cause unknown losses
and damages to the revenues.
 There is no such customer data base present with Amana limited and hence there is very
less scope for artificial intelligence for operational processing.
 The risk associated with failing to get the desired number of revenue units.
Option 2- Selling over online platform Amazon.
Amazon is one of the biggest online retail platform globally and an international renowned
platform. It is an e-commerce website which involves digital streaming, retailing, artificial
intelligence (Schaltegger, 2020).
Benefits of selling through Amazon:
 As it is worlds most renowned platform, there is guarantee for the revenue that the
business will generate.
 It is way more effective in the cost associated in compression with the personal website
that the business plans upon having.
 There is enough scope for having an increase in the revenue and the profitability that
Amana limited will earn if starting to retail on Amazon.

 An outstanding artificial intelligence system which helps in directing customer and
upsurge the company revenue.
 Guaranteed sales of 65000 units which may not be present on the company’s personal
website.
Disadvantages of selling through Amazon:
 There is no control over return and exchanges of products taking place.
 Lack of secrecy related to company’s future policies and plans.
 Giving discounts and offers is not under the control of the company and is the department
controlled by Amazon.
 The customer centric method of amazon is unfavourable for Amana Ltd as a profit
generating organisation (Serrato Guana, 2019).
Overall Analysis:
Both the options available with Amana Ltd. are effectively examined and analysed. Option A
of having company’s own website and selling on the same will require costing of £235000
whereas the option B of selling on Amazon will include an expenditure of £185000. Resulting
facts can be concluded from the analysis made of the two options available:
 Commencing an individual website for selling only the products of Amana limited will
incur high amount of cost in comparison with the cost involved in selling on the amazon.
 The certain sales on Amana’s own website will be approximately 100000 units involving
a cost of £235000 and additional opportunity cost of closing down other branches of
Amana limited.
 Amazon involves a guaranteed sale of 65000 units with an expenditure cost of £50000.
 Company’s individual website will offer access to an overall control over price and areas
relating to website policies.
 The race of competition on Amazon is very high and hence may affect the revenue being
generated from that platform for Amana Ltd.
From the different estimations and views discussed above it can be said that Amana
limited should deliberate upon commencing an online business on company’s own website as
it is comparatively the profitable choice for the business (Pelz, 2019). The reason behind is
that in today’s times, all the businesses are expanding globally and are shifting at a rapid
stride hence an online presence will definitely benefit the business. Along with this an

individual company specific presence on the website will save the company from the massive
competition which is prevalent on platforms like Amazon.

CONCLUSION
The above report provides the conclusion that preparation of budgets is an essential part
of any organisation which is dealing in today’s business environment. It assists the businesses of
Amana limited in ensuring an efficient working of the business tasks. The case study in the
above report concludes upon that Amana limited should work towards building its own website
for selling its products online and hence increase the revenue of the business. Also various
reasons are discussed due to which the revenues of Amana limited are lowering and the costs
incurred are accelerating. The conclusion made regarding this issue is that Amana limited has
been spending more on its predictions and the revenues generated are not enough in comparison
with those costs. These are the primary reasons because of which the efficiency of Amana
limited has reduced and the business is unable to attain its goals and objectives.

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