Question

William’s cafe prepares and sells meals in a university. The cafe’s budgeted figures
(planning budget) and actual figures for the year ending 30 June 2019 is given
below:

Budgeted
amount ($)

Actual amount
($)
Sales revenue 240 000 220 000
Expenses:
Cost of sales 140 000 110 000
Rent 24 000 28 000
Wages and salaries 36 000 38 000
Depreciation 3 200 4 600
Interest 3 600 2 800
Insurance 12 000 12 000
Electricity 4 000 3 800
Net profit 17 200 20 800

Required:
(a) Explain the importance of variance analysis in the budgeting process?

(b) Prepare a variance report and classify for each item whether it is a favourable
variance or unfavourable variance.
(c) Suggest one possible reason for the variance in cost of sales.

Answer 1

a) variance analysis is important to detect the deviation from the expected results. If the deviation is adverse , the reasons for the same could be detected on time. Also the goals and objectives need to be adjusted beacuse of variance in the results. If helps in knowing why the fluctuations happened and what could be done to reduce the effects .

2. There is unfavourable variance in sales . And consequently the cost of sales has reduced. But what matters is proportion of cost to sales value which is lower than expected. This is a favourable variance. Wages and salaries and depreciation are more without increase in sales. So this is also unfavourable. Interest expense and electricity is lesser than expected. Though sales are lesser than expected but the profit has increased by 3800. This is a favourable variation.

3. The possible reason for variance in cost of sales might be because of lower cost of materials or lower production