Question

Tim, a business owner with about $100,000 in annual sales and $5,000 net profit last year, notices some variances (see below) when comparing his actual annual numbers to budgeted numbers this year. Analyze these variances and comment on what likely happened over the past year. Also, make recommendations on what Tim should do with budgeting and operations next year.

Sales $880 unfavourable

Cost of Goods Sold                       $760 favourable

Variable selling expenses             $280 favourable

Fixed selling expenses                  $200 favourable

Fixed administrative expenses $600 favourable

Answer 1

VARIANCES ARE THE DIFFERENCE BETWEEN PLANNED AND ACTUAL NUMBERS

ANALYSIS OF VARIANCES GIVEN

1 SALES  

SO TIM HAD AN ANNUAL SALE OF $100000

WHERE AS THE SALES VARIANCE IS $800 UNFAVOURABLE

WHERE IN SALE VARIANCE IS

BUDGETED QUANTITY * BUDGETED PRICE - ACTUAL QUANTITY * ACTUAL PRICE

SO IT IS CLEAR THAT ACTUAL SALE IS $100000

AND BUDGETED SALE IS 100000+880= $100880

RECOMMENDATION FOR NEXT YEAR IS TO KEEP BUDGETED SALE AS $100000

2 COST OF GOODS SOLD

GIVEN $760 FAVOURABLE

COST OF GOODS SOLD VARIANCE IS

FLEXIBLE BUDGET QUANTITY * BUDGETED PRICE - ACTUAL QUANTITY * ACTUAL PRICE

AS THE VARIANCE IS FAVOURABLE IT MEANS THE ACTUAL COST INCURRED IS LESS THAN THE BUDGETED OF $ 760

RECOMMENDATION FOR NEXT YEAR :

BUGDET SHOULD BE EQUAL TO ACTUAL OF PAST YEAR

3 VARIABLE SELLING EXPENSES

GIVEN $280 FAVOURABLE

VARIABLE COST VARIANCE IS

FLEXIBLE BUDGET VARIABLE SELLING EXPENSES COST - ACTUAL VARIABLE SELLING EXPENSES INCURRED

IT IS $ 280 FAVOURABLE IT MEANS ACTUAL IS LESS THAN BUGETED OF $ 280

RECOMMENDATION FOR NEXT YEAR:

BUGDET VARIABLE SELLIN EXPENSES SHOULD BE EQUAL TO ACTUAL VARIABLE SELLING EXPENSES  OF PAST YEAR

4. FIXED SELLING EXPENSES

GIVEN $200 FAVOURABLE

IT IS FLEXIBLE BUDGET FIXED SELLING EXPENSES - ACTUAL FIXED SELLING EXPENSES INCURRED

AS THE VARIANCE IS FAVOURABLE IT MEANS THE ACTUAL COST IS LESS THAN THE BUDGETED

RECOMMENDATION FOR NEXT YEAR :

BUGDET FIXED SELLING EXPENSES SHOULD BE EQUAL TO ACTUAL FIXED SELLING EXPENSES OF PAST YEAR

5 FIXED ADMINISTRATION EXPENSES

GIVEN $600 FAVOURABLE

IT IS

FLEXIBLE BUDGET FIXED ADMIN EXPENSES - ACTUAL ADMINISTRATION EXPENSES INCURRED

IS IT IS FAVOURABLE IT MEANS ACTUAL IS LESS THAN BUDGETED OF $600

RECOMMENDATION FOR NEXT YEAR:

BUGDET FIXED ADMIN EXPENSE SHOULD BE EQUAL TO ACTUAL FIXED ADMIN EXPENSES INCURRED IN  PAST YEAR