Comprehensive Budget and Variance Analysis for Sky Cafe

This report provides a comprehensive financial analysis of Sky Cafe's budget for the month of July. It begins by outlining the objectives of preparing a budget, emphasizing its role in financial planning, resource allocation, and risk management. The core of the report focuses on a detailed examination of revenue and spending variances, comparing budgeted figures with actual performance. The analysis highlights unfavorable variances in revenue, facility rent, insurance, and fuel costs. The report then identifies specific management concerns arising from these variances, such as overestimation of sales volume and increased operational expenses. Finally, the report offers actionable recommendations to support Sky Cafe's objectives, including enhanced marketing efforts to boost sales, and the appointment of a qualified management accountant to investigate and address spending variances. The report concludes by reiterating the importance of budgeting for effective financial control and performance improvement.

Running head: ACCOUNTS AND FINANCE
Accounts and Finance
Name of the Student:
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Table of Contents
Introduction:....................................................................................................................................2
1. Objectives of preparing budget for Sky Café:.............................................................................2
2. Revenue and spending variance of Sky Café for the month of July:...........................................3
3. Identification of those activities of variances having management concerns:.............................5
4. Recommendation to Sky Café for supporting its objectives:......................................................7
Conclusion:......................................................................................................................................7
References:......................................................................................................................................9

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Introduction:
All business organisations aim to achieve success, competitive advantage, low costs,
increased revenues, long-term customer loyalty, greater earnings per share and increased market
value. For accomplishing the above-stated objectives, it is necessary to plan out the objectives in
an optimal way by considering plans like budgets. In business environment, a budget is
considered as a plan for the outgoing expenses and incoming revenues for an organisation for a
particular timeframe (Arnaboldi, Lapsley and Steccolini 2015). The main reason for preparing
budgets is to forecast the future outcomes after considering the likely changes to take place in the
upcoming years. Thus, annual budgets are the most widely used mechanism in order to control
expenditure and establish related performance targets. This paper would intend to explore the
objectives of preparing budget for Sky Café along with finding out budgetary variances by
highlighting on those areas that are of significant concern to the management. Finally, after
identification of such variances, recommendations have been provided to the organisation for
supporting its objectives.
1. Objectives of preparing budget for Sky Café:
Sky Café is an organisation, which is involved in preparing meals for its tourists and
citizens near the airport. Therefore, it is necessary for the management of the organisation to
prepare budget by keeping in mind the following set of objectives:
 The budget planning process would assist the management of Sky Café in identifying and
reviewing the effect on the cash flows, balance sheet and inventory planning of the

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organisation. Moreover, it would assist the organisation in assessing its financial position
and borrowing needs from the market (Bedford 2015).
 Another objective of preparing budget for Sky Café is that it allows the apportionment of
financial resources towards an important strategic plan developed by the management.
The management could only consider the task of accomplishing the particular identified
target after resource allocation.
 With the help of budget, the organisational management could respond effectively to the
market conditions for tracking quickly the process of goal accomplishment (Bedford,
Malmi and Sandelin 2016). The identification of risks would assist Sky Café in
implementing measures, which would result in minimisation of financial risk.
 Finally, with the help of a financial plan like budget, the management of Sky Café could
identify risk and return. It assists in the identification of gap between financing plans and
investment (Chenhall and Moers 2015). For instance, at the time of preparing budget, Sky
Café would be able to apportion resources as well as inventory for fulfilling the customer
demands adequately. These resources could be both short-term and long-term.
2. Revenue and spending variance of Sky Café for the month of July:
The revenue and spending variance of Sky Cafe for the month of July is presented briefly
in the form of a table as follows:
Particulars Details Budget Actual Variance Comments
Budgeted meals
quantity A 18,000 17,800 200 Unfavourable
Revenues B £ 81,000 £ 80,100 £ 900 Unfavourable

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Expenses:
Raw material C £ 43,200 £ 42,720 £ 480 Favourable
Wages and salaries D £ 10,600 £ 10,540 £ 60 Favourable
Utilities E £ 3,300 £ 3,290 £ 10 Favourable
Facility rent F £ 4,300 £ 5,100 -£ 800 Unfavourable
Insurance G £ 2,300 £ 2,600 -£ 300 Unfavourable
Fuel H £ 2,480 £ 2,490 -£ 10 Unfavourable
Total expenses
I=C+D+E+F+G+
H £ 66,180 £ 66,740 -£ 560 Unfavourable
Net operating
income J=B-I £ 14,820 £ 13,360 £ 1,460 Unfavourable
Table 1: Revenue and spending variance of Sky Cafe for July
(Source: As created by author)
The above table mainly helps in representing the variances related revenue and the
different expense items in the context of Sky Cafe for the month of July.
Revenue variance:
It has been identified from the case study that the organisation has estimated 18,000
meals to be sold in the month of July. The cost per meal is set at £4.50. However, in the month of
July, Sky Cafe managed to sell 17,800 meals to its customers and the cost per meal has remained
unchanged. As a result, the budgeted revenue has been more than the actual revenue by £200.
This amount is deemed to be revenue variance for Sky Cafe. In this context, Eldenburg et al.

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(2016) cited that revenue variance is used for measuring the difference between budgeted and
actual sales. This information is crucial for ascertaining the success of the selling activities and
perceived attractiveness of the products of an organisation.
In case of Sky Cafe, the selling price per unit has remained unchanged at the budgeted
and actual activity levels. However, a change could be observed in the number of units sold
between the budgeted quantity and the actual quantity. The budgeted revenue is obtained as
£81,000, while the actual revenue earned is £80,100. As a result, this has lead to unfavourable
revenue variance of £900.
Spending variance:
In the words of Heupel and Schmitz (2015), spending variance is the difference between
budgeted expenses and actual expenses. It mainly takes place at the time the budgeted figures are
not met. With the help of spending variance, the management of Sky Cafe could analyse the
departments and the managers on their capabilities in setting and fulfilling expense objectives.
These expenses could vary from direct materials to direct labour, as spending variance considers
all kinds of expenses (Isaac, Lawal and Okoli 2015). In case of Sky Cafe, the budgeted expenses
are obtained as £66,180, while the actual expenses incurred for the month are £66,740.
Therefore, the spending variance for Sky Cafe is deemed to be unfavourable.
3. Identification of those activities of variances having management concerns:
Certain activities of variances are deemed to have management concerns for Sky Cafe,
which are demonstrated briefly as follows:
Revenue:

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Revenue is identified as the first item, which requires management attention of Sky Cafe.
This is because Sky Cafe has overestimated the sales volume for the month of July, due to which
it has earned £900 less than the budgeted amount. This might be due to the reason that the
competitors of the organisation might have introduced new products at attractive points having
identical or better features than its products (Kotas 2014). Moreover, another chance that the
organisation has generated lower revenue is that the competitors have offered similar types of
meals at lower charges and as a result, this has minimised the number of meals sold. Finally, as
Sky Cafe is mainly dependent on tourists for generating sales, there might be chances that it has
overestimated the number of likely customers to enter into the organisation. Therefore, all these
reasons could be summed up to support the adverse revenue variance for Sky Cafe.
Facility rent:
It has been identified that Sky Cafe has estimated the facility rent to be £4,300 for the
month of July. However, it has to incur £5,100 in the same month, which is £800 more than the
budgeted amount. As the management of Sky Cafe has overestimated the sales volume, it might
have leased additional equipment for preparing the meals for the tourists. Moreover, the
mobilisation as well demobilisation expenses change considerably with the equipment size,
which might be the reason behind unfavourable variance for Sky Cafe (Otley 2016).
Insurance:
An unfavourable insurance variance of £300 is deemed to be observed for Sky Cafe,
which might be due to the fact that it has hired additional employees during the month to meet
the estimated demand and they are not taken into consideration while estimating insurance
expense.

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Fuel:
As observed from the above table, actual fuel expense is £10 more than the budgeted fuel
expense. This is because the organisation has to incur higher transportation cost for transferring
raw materials from the origin to the manufacturing area (Segun and Olamide 2015).
4. Recommendation to Sky Café for supporting its objectives:
In order to deal with the above-stated concern areas, the following recommendations are
provided to the management of Sky Cafe in order to support its business objectives:
 The organisation needs to emphasise on its marketing efforts for increasing the overall
sales margin. For instance, as Sky Cafe is located near an airport, it could use billboards,
leaflets and banners for drawing the attention of the customers. Special packages like
discounts and free gifts need to be provided to the customers for generating additional
sales revenue (Sponem and Lambert 2016).
 Sky Cafe needs to appoint an experienced and competent management accountant for
analysing the reasons behind unfavourable spending variance. Accordingly, corrective
actions could be taken for minimising such variance (Weygandt, Kimmel and Kieso
2015).
Conclusion:
It is apparent from the above discussion that Sky Cafe is required to prepare budget for
resource allocation and providing response to the market conditions appropriately. By comparing
the budgeted income and expenses, it has been evaluated that the organisation both revenue and
spending variance are deemed to be unfavourable. The activities that are of concern to the

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management include facility rent, insurance, fuel and revenue. Therefore, for dealing with these
issues, the management of Sky Cafe needs to increase its marketing efforts for boosting sales
performance and assess adverse variances for undertaking corrective actions.

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Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Managerial accounting. Wiley.