Introduction
Each company has short-term, medium-based, and long-term plans. All these are presented in terms of budgets and approximations as long as they are quantifiable items. However, due to the changes between the time of budgeting and the running of the business and other unexpected events, the budget does not represent the real accounts in the running of a firm. This gives rise to the need for an analysis of the budget so as to find out the variance and later on find the remedy for the variance. There are two types of variances; positive variance and negative variance. Positive variance is that which exceeds the approximations while negative variance reflects performance below the approximations. This paper analyzes the performance of a radio department manager by the budget performance.
Budgetary variances
Item Budgeted actual variance
DRG A cost $ 114, 750 $150,000 $35,250
DRG B cost $ 192,000 $ 200,000 $ 8,000
DRG C cost $ 0 $ 95,000 $ 95,000
DRG A quantity 9 10 (1)
DRG B quantity 24 20 (4)
DRG C quantity 0 1 1
Total cost $ 306, 750 $ 445,000 $ 130,250
Total volume 33 31 (2)
Average cost $9,295 $ 14,355 $ 5,060
Analysis
From the face value, the approximations that had been done five years ago are well below the actual targets that the company has witnessed. This is depicted by the positive variances that are registered by virtually all products in terms of costs. However, there is the negative variance that is recorded in terms of the quantities (Collier & Agyei-Ampomah, 2009).
It is a common scenario that due to the inflationary effects the cost of living goes higher than expected. This is most cases is pushed by the rise in the cost of commodities. Even though the budgetary team may be able to foresee the events that can lead to such occurrences, some events are unforeseen. This seems to be the case for the company in question. The approximated costs are below the actual costs. It is expected that the rate of inflation is thus higher than what was expected at the beginning of the five years.
Introduction of a new product
For a company to introduce a new product it must have been catered for in the budget. However, if it is not then its performance has to measure against the existing products of a firm. From the available information, the company had not budgeted for product C. however, its introduced beard fruits as it moved 1 volume in the year of introduction. When compared to the previously existing products- A and B, product C may appear to be performing poorly. The volume of C is ten percent that of A and five percent that of B. however, it is not feasible to measure a new product with established products. This volume can even rise above the volumes moved by the established products once the product is also established in the market (Collier & Agyei-Ampomah, 2009).
Negative variance in quantities
From the data above it is evident that the established product experienced a negative variance in volumes. This scenario is often caused by several factors. One of the common factors is the introduction of a new competitor without an increase in market size. This implies that the existing products have to give out part of their market to the new competitor. From the analysis, the new competitor cannot be the new product C. the aggregate positive variance of products A and B is far above the positive variance of product C.
The other scenario that may lead to a decline in volumes that are moved by a product is the loss of market to an existing product. This means that the volumes that are moved by the competing product are increased by the same variance. This is only proven once the competitors release their financial records. At that time data that is needed for such comparison is available (Prowler, & Morgan, 2005).
The loss of market to a competitor can be explained by two major reasons; laxity by the marketing team, and production of products of lower quality than before. However, improved marketing by competitors and improvement on the quality of the competing product without equal change to products A and B could as well have resulted in this scenario (Prowler, & Morgan, 2005).
Similarly, change in prices affects the number of volumes that are moved by a particular product in the market. According to the cost figures that are provided, the average costs of A and B recorded positive variances. It is expected that the variances are reflected in the prices of the same products. This may explain the decline in quantities from what was budgeted. However, this is only possible if the competitors either did not alter their prices or had a less price increase than the company (Prowler, & Morgan, 2005).
Average cost
The average cost is the cost at which each item of the company is sold at. From the data available, the average cost of the company had a positive variance. This is a result of the positive variance that is evidenced in the budgetary variance table above which is discussed in other sections of this paper. It is worth noting that, the changes in volume whether positive or negative do not affect the average cost variance. A product and a company can report a positive variance in average cost but due to negative variance in volumes report a negative variance in profits (Cleverly, Cleverly & Song, 2010).
Effectiveness of the manager
The manager is trying to fight the effects of positive variance in costs to sustain the market. The positive variances in A and we are 33% and 2 % respectively while the negative quantity variances are 1% and 16 % respectively. This implies that the manager has performed poorly in product B and commendably in commodity A. the manager should thus work towards rectifying the performance of product B either to be at per with the cost variance or even lower (Cleverly, Cleverly & Song, 2010).
Conclusion
From the above information, it is evident that the products of the company were not performing badly in terms of costs. This is commendable as long as it does not result in loss of market to the competitors. However, the marketing department should work towards getting back the lost market. The marketing of the new product C should also be stepped up o that it can perform at comparable levels with products A and B.
References
Collier, P. & Agyei-Ampomah, S., 2009. CIMA Official Learning System Performance Strategy. New York: Butterworth-Heinemann
Cleverly, W., Cleverly, J. & Song, P., 2010. Essentials of Health Care Finance. New Jersey: Jones & Bartlett Learning.
Prowler, M. & Morgan, E., 2005. Financial management and control in higher education. New York: Routledge