Budget Analysis Essay Example
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Budget Analysis Essay – Part 2
BUDGET MANAGEMENT ANALYSIS To have a basis in illustrating the analysis of variance or difference between budgeted and actual figures, the budget of a sampled (unknown) company was utilized (http://www – Budget Analysis Essay introduction. smallbusinessnotes. com/business-finances/budgeting-systems. html). | | | | | | | | | | | | | | | | | | | | | | | | |Sample Company | | | | | |Budget | | | | | |January 1, xxxx to December 31, xxxx | | | | | | | | | | | |Category |Actual |Budget |Difference | | | |Net Sales |385,400 |300,000 |85,400 | | |Cost of Goods | | | | | | | | Merchandise Inventory, January 1 |160,000 |160,000 |0 | | | Less Inventory, December 31 |100,000 |120,000 |-20,000 | | | Cost of Goods Sold |182,500 |132,000 |50,500 | | | Gross Profit |202,900 |168,000 |34,900 | | |Interest Income | 500 | 700 | (200) | | |Expenses | | | | | |
Net Income |$69,210 |$61,850 |$7,360 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | VARIANCE ANALYSIS: 1. There was a 28. 47% increase in sales. This would indicate marketing effectiveness. 2. Purchases increased by 33. 33%. Purchases increased by 33. 33%, indicating a possibility that the company must have purchased additional raw materials to cope with increased volume of sales orders. Proposed strategy: More effective analysis of inventory to control purchase levels. 3. Freight charges increased by 25%. This could have been caused by: a) increase in sales b) Ineffectiveness in managing the delivery of materials and products. Strategy to minimize variance: Better scheduling of delivery of materials. 4.
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Salaries increased by 52. 22% (23500/45000). The following are the possibilities: a) Some employees may have been asked to work overtime in certain periods. b) Additional employee/s may have been hired during the period to cope with exigencies. Proposed strategy: more effective scheduling of workloads. 5. Utilities increased by 28. 89% (1300/4500). Power, electricity, water, and other related consumptions may have increased during the period to cope with increased demand. Proposed strategy: more realistic forecast of utilities consumption through consideration of production operations. 6. Rent – same 7. Office supplies decreased by 25% (750/3000).
There may have been improvements in company’s operational efficiencies resulting to a 25% savings. 8. Insurance – same 9. Advertisement decreased by 3. 89% (350/9000). There is a possibility that the marketing department may have decided to lessen its exposure in some media. The product may have moved to another stage in the cycle that an aggressive advertisement may not have been necessary. 10. Telephone expenses decreased by 17. 39% (400/2300). It is either that communication needs is lesser, volume of business transactions decreased, or the company opted for other means of communication. 11. Travel and entertainment increased by 27. 5% (550/2000).
Travel and entertainment activities and corresponding expenditures were not effectively controlled by the management, causing a large percentage increase. 12. Interest paid decreased by 14. 4% (360/2,500). It is possible that some financial commitments may have been fully paid or, the company did not pay some of its periodic obligations. 13. Repairs and maintenance increased by 25% (250/1000). Machineries and equipment may have become too old that maintenance and repairs expenditures are too high; people handling some machineries and equipment have not been well trained to perform their respective functions; or maintenance personnel have not been effective. Recommend three benchmarking techniques that might improve budget accuracy in future forecasts 1. Sensitivity analysis
This analysis is also called the “what if” approach which is used to analyze cash flows under variety of circumstances. This method is responsive to changes in the internal and external environments. 2. Simulation This analysis simulates the occurrence of sales and other uncertain events. Through this simulation, the firm develops a probability distribution of its cash flow at the end of a given period. 3. Pro forma statements 1. Developing a pro forma statement using percent-of-sales method. At first, sales are forecasted. This is followed by expressing the various income statement items such as the various expenses as a percentage of sales. 2. Developing pro forma income statement using judgmental approach.
Some items in the income statement are estimated, while the other items are based on some management assumptions (Gitman, 2006). Among the three methods, the sensitivity analysis is recommended because forecasts of sales and various expenditure items are made under variety of circumstances. This would make the estimates more realistic. Subjectivity or biases (resulting from some management assumptions) will also be minimized. REFERENCES: Gitman, Lawrence J. (2006). Managerial Finance. Pearson Education south Asia Pte. Ltd. Keown, Arthur J. , et al. (2002). Financial Management: Principles and Applications Pearson, Education, Inc. Scott, Martin Jr. and Keown, Petty (1999). Basic Financial Management. Prentice- Hall, Inc.