Therapeutic Variance Analysis

The purpose of this paper is to describe the budget process, variances and the major reasons of the variance to make all the financial decisions of the firm properly. This paper would also be helpful to explain that “make” or “Buy” decisions also play a significant role to improve the efficiency of the firm. In addition, the paper would also be useful to clarify that non-financial performance measure may be unsafe for the image of the firm.

Management had difficulties in communicating the two variances to its senior managers. The calculation of the two variances started with the standard fixed cost per ton which was derived by following formula:

Use of the flexible budget shows the budgeted operating income given the actual sales. When you compare the flexible budget to the actual budget you are able to compare the total sales and cost incurred given the same units sold. The sales price variance, which is the actual sales less the flexible budgeted sales, was $14,700 favorable. This means that actual sales were higher than budgeted sales at that usage. This is attributable to the increase in service price from $25 to $26.40. Price variance for material usage was $2,100 over the flexible budget projection. This could be attributed to overuse or waste of materials. As expected, the direct labor price variance was $3,375 lower than the flexible budget amount. This is attributed to the manager’s effective use of labor. Operating expenses were also higher than the flexible budget

* Direct Labour variance: Unfavourable by $22.000. Again, we need to find out whether this is Price and/or efficiency driven. We know that according to the accountant information, the actual price is $16,4/unit while the Standard price is $16/unit. On the other hand, the Standard Quantity is 14.000 units while the actual Quantity is 246.000/16,4=15.000 units. Therefore:

With the increasing ramification of economic changes and complex business functioning, each and every company has to implement budget variance analysis to identify the fluctuation in projected amount. In this report, Peyton Approved Company has been taken into consideration to evaluate the effectiveness of business functioning and plant’s operation in determined approach. It reviews the efficiencies and effectiveness of their plant’s operations. With the help of budget variance, it could be easily determined whether Peyton Approved Company has been performing its business throughout the time. Budget variance is the technique which is used by Peyton Approved Company to identify the fluctuation and variability in the set budget and implemented project. Budget variance is defined as differences between the actual amounts of expense incurred by Peyton Approved Company. It is evaluated that when Peyton Approved Company has positive cash flow in its planned budget. For instance, if amount of expenses incurred by company is less than its planned or estimated budget expenses then company has positive budget variance and vice-versa. This could be defined with the estimation of cost budget variance. The formula for the same has been given as below (Steffan, 2008).

B. 1. The impact of costs on the decision to move forward with the new Maui Sandal line is as follows: As the production continues, the hours needed for each batch, or individual pair, will begin to decrease. By continuing to produce this line the total labor costs will continue to decrease, but most likely, at a slower rate as more sandals are produced. This data can help the company decide employment levels, capacity, costs, and their pricing of this particular merchandise in the open market. The company predicts that it will take 1,000 labor hours for production to complete for the first batch, with 50 total batches between month 1 and month 4.

Another concern identified, is the utilities expense budget for utilities in Year 9 which is $150,000. This amount is identified as a fixed amount and is unrelated to actually production activities and manufacturing efficiency. Considering that production levels and activity fluctuates throughout the year, the budget for utilities should be a variable item. An example; from Year 7 to Year 8, the utilities expenses increase by $15,000 and with this detection, ways to reduce this expense should be investigate. Another concern is a duplicated line item under the Selling, General, and Administrative Budget for Utilities and Utilities and Services. Another issue for concern, Total Variable Cost was reported to be lower; however was not enough for the lack of sales combined with an increase in advertising and transportation which resulted in an overall negative result. The low Net Sales directly impacted the Contribution Margin which decreased by $49,397. Overall, these concerns indicate the need for a flexible budget with variance analysis.

11. Utilities and services standard output $150,000, actual output is $$218,000. This is a favorable variance of -$1777. This variance is due to reduce sales, less power at the plant is needed because less units are being made. 12. Research and Development standard output is $85,861, actual output is $82,841. This is a favorable variance of -$3,020. This variance is due to cut backs in R&D because of slow sales and low demand for new bikes. 13. Other General and Admin Expenses standard output $170,000, actual output is $172,000. This is an unfavorable variance of $2000. This increase is due to addition materials needed for advertising. 14. Other utilities and

This was favorable, but the Efficiency Variable was 100,000 unfavorable. This suggest that Competition Bike received a great price, but with the unfavorable Efficiency there were a lot of left over materials suggesting the material might not be the best quality. Direct Labor had a 150,000 Unfavorable Variance, but had a 50,000 favorable Efficiency Variance. The labor cost was up due to the high skill level needed for the bike manufacturing. The 50,000 favorable Efficiency Variance enabled the high skill labor to perform the task very efficiently. The Manufacturing Overhead had a 24,000 unfavorable Price Variance, and a 2426 unfavorable Efficiency Variance. The Advertising Cost had a 5,000 unfavorable Price Variance and a 1246 favorable Efficiency Variance. This suggest that Competition Bike spent more on Advertising in order to boost lagging sales, and the favorable Efficiency Variance shows that even though more was spent than budgeted, the money spent was efficient and worth the increase. The Transportation Out had a 3207 unfavorable Price Variance and a 2400 unfavorable Efficiency Variance. This suggest that Transportation cost were up due to increased fuel cost, and this increase in cost resulted in unfavorable Efficiency Variance due to transporting fewer bikes with increase in fuel cost.

* The variances are due to the Mile High Cycle company not forecasting for increased production. The company budgeted for the production of 10,000 cycles but the actual production was 10,800 units. When the company increased production, the production efficiency decreased. The company had to use or rework parts that added extra cost to the expenses; the reworked parts added $25,000 of extra expenses to the wheel assembly production and $45,000 to the final assembly process. The material,

In production costs variance chart above, Direct labor price variance(sum of direct labor variances of round, square and oval) valued at $14,913, and Oval production cost variance valued at $8,381.

In this table, it reflects the changes in fixed plant overhead from $420,000 to $378,000. The company still has the fixed selling and administrative expense per quarter of $118,000. The new company fixed overhead is now at $496,000 from the past $538,000 ($42,000) change from past to

ill be hard for the Danshui to assemble 2.4million iPhones at the deadline 31 May 2011. (TermPaper Warehouse)

Companies will have set guidelines to trigger the need for a variance report such as variances over a specific percentage or dollar amount. (Cleverly, Song, & Cleverly, 2011, Pg. 381) In an analysis of revenues, a negative variation is unfavorable; in an analysis of costs, a negative variation is favorable. (Dove & Forthman, 1995) Variation is calculated by subtracting the expected or budgeted figure from the actual figure for each variable. The variable figure is then divided by the expected figure in order to establish a percentage of the variance. Wages that are over the budgeted amount would be an unfavorable variance and would be an indication that there is a need for a variance report. (Dove & Forthman, 1995) Supply costs being less than the budgeted amount would be a favorable variance, however it could result in the supplies budget being reduced if there is not a reasonable explanation as to the cause for the variance. Therefore, a variable department manager would ask for a variance report detailing the reason for the variance to be completed, otherwise it appears as if the budget is overstated and needs to be reduced.

The cost of raw materials impacted the actual profit through the price variance and the quantity variance of the direct materials. Using the level 3 analysis, it was determined that the price variance was favorable €46 and the quantity variance was unfavorable €17 which represented a flexible budget variance of favorable €29. This impacts the profit because the Italian region was very efficient with their costs of direct materials, but the Italian region came up short in their manufacturing efficiencies as they experienced an