Home > Free Essays > Business > Company Analysis > Orchid Ltd.’s Actual and Flexed Budget Variance
Cite this

Orchid Ltd.’s Actual and Flexed Budget Variance Research Paper


Basis for Analysis

Orchid Ltd. is a small furniture manufacturing company that faces issues related to the increased cost of manufacturing. The management feels that if the company does not control the rising cost of manufacturing, the company’s profit may decline in the future (Walther & Skousen 2009). The current report provides key findings from the budget analysis and identifies different variances recorded between the actual budget and the flexed budget. The management of the company must understand that the preparation of budgets is a crucial step in planning for different business activities. It can help the management in identifying changes in its cost with different levels of production and sales. Therefore, it is important for the management to anticipate fixed and variable costs of production efficiently to avoid an unfavourable situation.

Actual and Flexed Budgets

The analysis is divided into two parts including (1) preparation of actual and flexed budgets and (2) identification of variances in price, volume, and overhead. It could be noted that the actual budget profit based on the planned sales of 800 units was less than the flexed budget profit. The reason is that the company generated more sales revenue and its costs were spread over more units sold. There are two types of cost involved in production namely variable costs and fixed costs (Lalli 2011). The variable costs change with the increase in sales. Therefore, the management should ensure that the company manages its variable costs effectively by renegotiating its existing contracts with suppliers and improving the working efficiency of employees.

Variance Analysis

The variance analysis is performed in this report by comparing the standard costs of production with the actual cost to determine variances in price, volume, and overhead (Wyatt 2012).

Sales Variance

The sales variance analysis indicated that the volume variance as favourable as the company recorded more sales than the actual budget. However, the price variance as unfavourable. The actual price was lower than the standard price that resulted in an unfavourable effect on the company’s business. The actual price was calculated by dividing the actual sales revenue by the actual units sold.

Direct Materials Variance

The direct materials variance indicated that the volume variance as unfavourable. The company used more direct materials to generate higher sales. Since the cost associated with direct materials is variable, therefore its impact on the company’s profitability is expected to increase with a favourable change in sales. The company should try to reduce its variable material cost. The price variance of direct materials is favourable as the company was able to allocate its standard cost over a higher number of units sold. The actual price was calculated by dividing the actual direct material cost by the actual units sold by the company.

Direct Labour Variance

The direct labour variance indicates that the company’s labour spent more hours for selling additional ten units of furniture. It indicated a major weakness of the company as it was not able to control its direct labour cost. The company should monitor the working schedule and identify reasons for the increase in the number of labour hours. The variance of working hours was significant that resulted in an unfavourable efficiency variance. Furthermore, the analysis indicated that the price variance related to direct labour was also unfavourable. The reason was higher actual labour cost per hour and the unfavourable increase in labour hours.

Fixed Overhead Variance

The fixed overhead also changed as the company sells additional units of furniture. The fixed overhead variance was unfavourable but it was acceptable as the company generated higher sales.

Conclusion

It could be concluded from the analysis that the increase in sales resulted in both favourable and unfavourable variances in price and volume of production inputs. The management needs to focus on cost elements that had unfavourable variances to manage its costs efficiently and effectively.

Appendix

Budgeting

Actual Budget
£ £
Sales 800*950 760,000
Less:
Direct Materials 240*800 192,000
Direct Labour 250*800 200,000
Fixed Overheads 160*800 128,000 520,000
Operating Profit 240,000
Flexed Budget
£ £
Sales 950*810 769,500
Less:
Direct Materials 240*810 194,400
Direct Labour 250*810 202,500
Fixed Overheads 160*810 129,600 526,500
Operating Profit 243,000

Sales Variance

  • Volume variance = Standard Price * (Actual Sales – Standard Sales)
  • Volume variance = 950 * (800 – 810) = 9,500 F
  • Price variance = Standard Quantity * (Actual Price – Standard Price)
  • Price variance = 800 * (930 – 950) = £16,000 U
  • Actual price = Actual sales revenue / Actual units sold = 753,300 / 810 = £930

Direct Materials Variance

  • Volume variance = Standard Price * (Actual Quantity – Standard Quantity)
  • Volume variance = 30 * (810 – 800) = 300 U
  • Price variance = Actual Quantity * (Actual Price – Standard Price)
  • Price variance = 810 * (237.65 – 240) = £1,903.5 F
  • Actual price = Actual direct material cost / Actual units sold = 192,500 / 810 = £238

Direct Labour Variance

  • Efficiency variance = Standard Rate * (Actual Hours – Standard Hours)
  • Efficiency variance = 25 * (8,500 – 8,100) = 10,000 U
  • Price variance = Actual Hours * (Actual Rate – Standard Rate)
  • Price variance = 8,500 * (26 – 25) = £8,500 U
  • Actual price = Actual direct material cost / Actual units sold = 221,000 / 8,500 = £26

Fixed Overhead Variance

  • Fixed Overhead Variance = Actual Amount – Flexed Amount
  • Fixed Overhead Variance = 128,000 – 129,600 = £1,600 U

Reference List

Lalli, WR 2011, Handbook of budgeting, John Wiley & Sons, Hoboken.

Walther, LM & Skousen, CJ 2009, Budgeting and decision making, Bookboon, London.

Wyatt, N 2012, The financial times essential guide to budgeting and forecasting: how to delivery accurate numbers, Pearson Education Limited, Harlow.

This research paper on Orchid Ltd.’s Actual and Flexed Budget Variance was written and submitted by your fellow student. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.
Removal Request
If you are the copyright owner of this paper and no longer wish to have your work published on IvyPanda.
Request the removal

Need a custom Research Paper sample written from scratch by
professional specifically for you?

Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar

certified writers online

GET WRITING HELP
Cite This paper

Select a referencing style:

Reference

IvyPanda. (2020, August 14). Orchid Ltd.'s Actual and Flexed Budget Variance. Retrieved from https://ivypanda.com/essays/orchid-ltds-actual-and-flexed-budget-variance/

Work Cited

"Orchid Ltd.'s Actual and Flexed Budget Variance." IvyPanda, 14 Aug. 2020, ivypanda.com/essays/orchid-ltds-actual-and-flexed-budget-variance/.

1. IvyPanda. "Orchid Ltd.'s Actual and Flexed Budget Variance." August 14, 2020. https://ivypanda.com/essays/orchid-ltds-actual-and-flexed-budget-variance/.


Bibliography


IvyPanda. "Orchid Ltd.'s Actual and Flexed Budget Variance." August 14, 2020. https://ivypanda.com/essays/orchid-ltds-actual-and-flexed-budget-variance/.

References

IvyPanda. 2020. "Orchid Ltd.'s Actual and Flexed Budget Variance." August 14, 2020. https://ivypanda.com/essays/orchid-ltds-actual-and-flexed-budget-variance/.

References

IvyPanda. (2020) 'Orchid Ltd.'s Actual and Flexed Budget Variance'. 14 August.

More related papers
Pss... Stuck with your
assignment? 😱
Support
Online
Pss... Stuck with your assignment? 😱
Do you need an essay to be done?
What type of assignment 📝 do you need?
How many pages (words) do you need?
What’s your deadline? ⏰ Let's see if we can help you!