Question

The role of budget in controlling the future performance of the company in today`s business environment.(Variance analysis of revenues and costs). for a research

Answer 1

Budget and Variance Analysis

For the development of the organization Budget must be prepared by the department and comparison be made from time to time of actual and the standard and analysis of the variance. from the variance various decision are taken for the firm.

There is set rule for the cost and set rule for the revenue sale and the profit. cost include all material , labor, and overhead. if actual cost is more than standard than variance is unfavorable otherwise favorable. and for sale if actual sale is more than the standard than variance is favorable otherwise it is unfavorable.

Members responsible for the Variance

It is true that the working of the firm is jointly efforts of all the managers towards the achievements of the goals of the organization.

Basically, management by exception rule is applicable on the attention of the sale price variance and the material cost variance. Normally these two variance are under the controlled of the management on the ground that upper level marketing managers are generally responsible for the sales price variance and the mid-level managers are responsible for the purchasing agents are basically held for the materials and the costs variance.

Budget is forecast for the future and it must be prepared by the firm for the betterment of the result and the growth of the firm.

Upper level sales managers are responsible for determined the sales price for the product and if actual sales price must be more than the budgeted than variance is favorable.

Similarly, costs must be under controlled by control over wastage and standard price must be more than the actual and actual cost must be under controlled for the benefit of the firms and if actual cost is less than the expected than variance is favorable otherwise it is unfavorable.

Usefulness of Variance

Variances are used to evaluate the performance of the management on the ground that variance are favorable or unfavorable.

-Favorable sales variance means actual sales are more than the expected sales

-Unfavorable sales variance means actual sales are less than the expected sales

-Favorable costs variance means actual cost are less than the expected cost

-Unfavorable costs variance means actual cost are more than the expected cost

From these analysis managers performance can easily evaluated and accordingly action are made for the benefit of the company.

Contribution margin is also depends upon the sales and the cost price if cost under control than margin is more and advantage to the firm. So every efforts should be taken to control and raise the profitability of the organization.  

Flexible Budget Variance

This variance is calculated by taking the difference between revenue from the sale of the product and the variable costs. This is determined by multiply the standard rate to the actual number of unit and the also the multiply the actual rate to the actual quantity.

After this we take a difference of flexible budget amount and actual amount. Now, for sale if actual amount is more than the standard than variance is favorable otherwise it is unfavorable. But for the cost the rule is opposite which is if actual cost is more than standard amount than variance is unfavorable and otherwise it is favorable.

Due to the fact that sale is revenue and the cost is expense.