Home > Free Essays > Business > Financial Management > The Importance of Budget Variance Report Submission

The Importance of Budget Variance Report Submission Coursework

Exclusively available on IvyPanda Available only on IvyPanda
Updated: Sep 22nd, 2022

Introduction

Nowadays, companies pay vehement attention to their financials and carefully develop their budgets, as these documents help allocate different types of resources effectively (Nobles, Mattison, & Matsumura, 2014). Nevertheless, some problems may take place. Consequently, the primary goal of the paper is to discuss the operating budget, conduct variance analysis of direct materials and labor, explain its findings, and determine the aspects that have to be investigated to understand meanings of variances. In the end, conclusions are drawn to summarize the main findings of the paper.

The Budget Variances

To conduct a budget variance analysis, it is necessary to calculate cost/price and efficiency variances for direct labor and materials. In the first place, the efficiency variance can be defined as the difference between the actual and budgeted results (Clowes & Scriven, 2016; Nobles et al., 2014). Meanwhile, cost/price variance majorly focuses on presenting the sum of variances for different aspects, and it is calculated with the help of the following formula: cost price variance=(actual cost – budget cost)*sales (Shim & Siegel, 2009). These variances are essential elements of budget evaluation, as without them, it will be impossible to identify potential risks and deficiencies (Nobles et al., 2014). Consequently, using them is vital in the context of the presented company to assess the created budget.

When evaluating direct labor, its price/cost variance tends to be favorable, as the difference is 33,000 (528,000-495,000). In this case, it will have a positive effect on profits of the company. Nevertheless, labor efficiency variance is unfavorable with the negative value of -48,000 (480,000-528,000), and the total variance value of -15,000. A combination of these results implies that the management of direct labor is ineffective. Subsequently, apart from the positive values of price/cost variance, the total variance is unfavorable, and it will have an adverse impact on volumes of forecasted sales and overall financial stability of the business.

As for direct materials, similar formulas are applied when calculating their variances. For example, direct materials price/cost variance equals to zero (240,250-240,250), and it could be considered as favorable. It shows that the resources are used effectively, and it can potentially have a positive impact on the organizational financial performance. Nonetheless, material efficiency variance is unfavorable with the value of -28,058 (212,195-240,250), and it states that apart from favorable price/cost variance, the overall effectiveness of direct materials allocation is questionable. As a result, this negative outcome is forecasted to have an adverse effect on financial stability and question the possibility of reaching projected sales. Overall, the variance results portray that the company utilizes its direct labor and materials ineffectively and has to reconsider its inputs in different states of the expenditure.

Reasons for the Variances

In turn, variance analysis is not only used to determine whether the variances have a critical impact on the overall financial performance of the company but also it depicts the main problems that have to be fixed to diminish such differences (Daft & Samson, 2014). Along with that, calculating variances is often used as a tool to mitigate risks, as spotting them at the right time can assist in avoiding negative consequences (Pritchard, 2014). For example, the variances of direct labor are dependent on an array of factors, and, according to operating budget, and they are Labor Requirements per Unit, Sales, Total Labor Hours Needed, and Labor Rate. It is necessary to investigate these matters because they affect direct labor. In this case, it seems that the company might have underestimated the required volumes of labor since the actual numbers were higher than standard quantity. In turn, the enterprise did not consider possible price fluctuations or take into account a potential increase in sales and a subsequent rise of the required labor. Nevertheless, apart from possible mistakes, calculations, and interpretations, one cannot underestimate the impact of the human factor, as employees may experience difficulties when starting using new equipment due to the lack of training and competencies. This matter increases the percentage of mistakes, and, as a consequence, questions the efficiency of labor.

In turn, unfavorable variances of direct materials may signify that statements of expenditure such as Materials Required per Unit and Materials Needed for Production are not carefully evaluated. Consequently, this inaccuracy in calculations explains unfavorable efficiency variance. It is essential to consider these matters since they have a clear impact on the total amount of direct materials due to their interdependence in operating budget. For example, to calculate Materials Needed for Production, it is necessary to multiply Production Budget (units) by Requirements per Unit. The management of the company has to conduct market research and assess different aspects that affect the appropriate usage of direct materials. At the same time, this component is directly linked to the performance of workforce, as their inappropriate behavior and lack of competencies may result in an unexpected unfavorable variance increase (Magad, 2013). Overall, these factors along with sales forecasts have to be investigated in detail, as, otherwise, the company would continue losing its profits due to its insufficient estimation and planning.

Conclusion

Overall, this analysis portrays that total direct materials and labor variances tend to be unfavorable for the company and will have a negative impact on its performance. These matters take place due underestimations and mistakes when designing a budget and defining its states of expenditure. Along with that, the aspects such as the lack of competencies and know how can also be potential causes of the decrease in efficiency. To summarize, the company has to consider carefully evaluating its current budget and adjusting it.

References

Clowes, R., & Scriven, V. (2016). Budgeting: A practical approach. Frenchs Forest, Australia: Pearson Higher Education.

Daft, R., & Samson, D. (2014). Fundamentals of management: Asia Pacific edition. South Melbourne, Australia: Cengage Learning.

Magad, E. (2013). Total materials management: The frontier for maximizing profits in 1990s. New York, NY: Springer Science + Business.

Nobles, T., Mattison, B., & Matsumura, E. (2014). Horngren’s financial and managerial accounting. Upper Saddle River, NJ: Pearson Education, Inc.

Pritchard, C. (2014). Risk management: Concepts & guidance. Boca Raton, FL: CRC Press.

Shim, J., & Siegel, J. (2009). Modern cost management & analysis. Hauppauge, NY: Barron’s Educational Series.

This coursework on The Importance of Budget Variance Report Submission 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 Coursework sample written from scratch by
professional specifically for you?

801 certified writers online

Cite This paper
Select a referencing style:

Reference

IvyPanda. (2022, September 22). The Importance of Budget Variance Report Submission. https://ivypanda.com/essays/the-importance-of-budget-variance-report-submission/

Reference

IvyPanda. (2022, September 22). The Importance of Budget Variance Report Submission. Retrieved from https://ivypanda.com/essays/the-importance-of-budget-variance-report-submission/

Work Cited

"The Importance of Budget Variance Report Submission." IvyPanda, 22 Sept. 2022, ivypanda.com/essays/the-importance-of-budget-variance-report-submission/.

1. IvyPanda. "The Importance of Budget Variance Report Submission." September 22, 2022. https://ivypanda.com/essays/the-importance-of-budget-variance-report-submission/.


Bibliography


IvyPanda. "The Importance of Budget Variance Report Submission." September 22, 2022. https://ivypanda.com/essays/the-importance-of-budget-variance-report-submission/.

References

IvyPanda. 2022. "The Importance of Budget Variance Report Submission." September 22, 2022. https://ivypanda.com/essays/the-importance-of-budget-variance-report-submission/.

References

IvyPanda. (2022) 'The Importance of Budget Variance Report Submission'. 22 September.

Powered by CiteTotal, easy bibliography generator
More related papers