The Twin Rivers Café is a company that prepares meals for tourists and citizens in its kitchen located next to the local airport. The company’s planning and actual budgets for July appears below:
The Twin Rivers Café
Planning and actual budgets for the month ended July 31, 2018
Budgeted meals quantity(q)18 00017 800
Revenues (£4.50q)£81 000£80 100
Raw material (£2.40q)43 20042 720
Wages and salaries (£5 200+£0.30q)10 60010 540
Utilities (£2 400 + £0.05q) 3 300 3 290
Facility rent (£4 300) 4 300 5 100
Insurance (£2 300) 2 300 2 600
Fuel 2 480 2 490
Net Operating Income£14 820£13 360
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|TWIN RIVER CAFE|
|Budget and Variance Analysis|
a) Objectives of budget preparation
Budget is the process to estimate the future and; to operate itself to work as a going concern. The company‘s future planning and growth are based on the operation as to how the company operates with the available resource. The budget is to be prepared because the resources are not available to the company all the time as this is a channel in the regular operations in the company. The company prepares the objective for the future and sets the operational target. To achieve these small targets, the company has to start with estimation and this estimation is called a budget (Lai, Zin, Yahya, & Saar. 2016). With the help of the budget, the company can communicate all its plans and small target to the shareholder of the company and this also motivates the company’s employees to achieve their performance. After budget preparation and work accordingly, the company evaluate its position and check the variance in the prepared budget and actual working. The variance analysis helps to evaluate the performance of the company and facilitate the company to identify the factor due to which the variance occurs and help to improve in future preparation (Bonamente, 2017).
The main objective of the company can be defined with bullets as explained below:-
Budget is prepared in the beginning with the target and looks forward to attaining these targets during the year. This will help the company to complete all the operations and reduce the difficulties in the operations of the company. Planning also gives the rule of performance to the employee of the company so that they can be motivated to achieve their objectives (Bonamente, 2017).
Budget gives the direction to the company and prepares the company for the future and ongoing operation to overcome the objective with the available resources so that it does not create the hurdles to the company during the year.
The company evaluates the performance of the company and controls the activities which can be prevented so that the budget target can be achieved (Wang, Fong, Wu, & Wong, 2016).
After achieving the result and performing according to the budget, evaluates and identify the reasons due to which the variances occurred and resolve it for further action or in budget.
b) Revenue and spending variance and reason for management concern
Statement of variance showing the changes in variance and remarks for July
|The report showing the variances of Twin River Café|
|Particulars||Budget||Actual||Variances||variances remarks||variances in%|
|wages and salaries||0.30||5,400.00||0.30||5,340.00||60.00||F||1%|
|Total variable cost||2.75||49,500.00||2.75||48,950.00||550.00||F||1%|
|wages and salaries||5,200.00||5,200.00||-||-||0%|
|Total fixed cost||16,680.00||17,790.00||(1,110.00)||A||-7%|
|Net operating income||14,820.00||13,360.00||1,460.00|
Importance of the variances for the management
Budget and variances analysis facilitates the management to understand the factors affecting the budgeted data and the actual data so that the future objective of the company can be achieved. The company looks forward to work in a long period with the objective of profit and for it, prepare the budget and attain the target, if any deviation arises in the expectation then it should take appropriate action. Management should identify the reason due to which the company is not attaining the objectives which are planned by the company (Templeton, & Burney, 2016). With the help of a statement of variance analysis report, management will mitigate the adverse factor and improve the current situation. In this report, management can check that the budgeted production and sales of the company have an adverse variance due to which all the variable cost variances are favorable as the quantity is reduced by 900 units. The fixed cost in the budget statement has increased. The increased fixed cost has adverse variance and the ultimate effect was on the net operating income. If the company could control the fixed cost then the operating income of the company can be increased. Here, the estimated fixed cost of the company has increased and due to which the outcome is adverse (Vesty, & Brooks, 2016).
The management should take into concern the adverse variance and should focus on to increase the sales so that the adversity can be converted into favorability. The twin river café should increase its sales and reduce the expenditure like fixed cost and if Twin River Café cannot reduce its fixed cost by increasing the sales so that per-unit fixed cost will be less (Accolley, 2018).
c) The management concern on the Activity of variance
The activities of variance that should be concerned by the management are those activities that affect the company’s objective and decision making and the activities which do not change with the level of production. There are two types of variances like favorable variances and adverse variances; both variances have a significant role in business decision making Twin River Café has planned and prepared the budget to achieve its objective (Conine, & McDonald, 2017). The company has an adverse variance in revenue as the quantity sold not as per the budgeted quantity and due to which the variable cost has a favorable condition. But the most important concern that is required on the activity of variances is the fixed cost of the company (Noholo, & Wuryandini, 2018). The fixed cost such as utility expenses, rent expenses, facility rent, fuel, and insurance, are having adverse variance because the company could not act as per the budget (Silvester, 2017).
The Twin river café is going to start the business near the airport and for it, the company estimated all types of expenditures and set the benchmark to a level of sales quantity. The main objective behind this budget is to high sales and increased profit. But as per the actual result and budgeted plan the variance occurred and all these adverse variances due to the fixed expenditure and reduced level of sales.
The activity of variance should be favorable to the management as what the company planned and can achieve it. The fixed cost expenditure and the quantity both are unfavorable to the management because due to the low level of quantity, the company cannot achieve its benchmark as they planned. The variance and analysis can be better understood with the following table (Tan, & Low, 2017).
|Activity of variances that should be of concern to the management.|
|Particulars||Budget||Actual||variances||variances in %||Remarks and suggestion to the activity of variances|
|Quantity||18,000.00||17,800.00||-£ 200.00||-1.11||Need to increase|
|facilities rent||£ 4,300.00||£ 5,100.00||-£ 800.00||-18.60||Need to control and should reduce so that the profit can be increased|
|insurance||£ 2,300.00||£ 2,600.00||-£ 300.00||-13.04|
|fuel||£ 2,480.00||£ 2,490.00||-£ 10.00||-0.40|
According to the above table, the results can be seen that the company estimated the quantity of 18000 units but the company made the sales only of 17800 quantities and the adverse variance of the units is 1.11% i.e. of 200 units. These 200 units’ variances, the total cost p.u are increased and the level of profit is decreased. Because the fixed cost does not vary according to the level of production and total cost P.U can be reduced only by producing more quantity. The facilities rent, fuel, and insurance are spent more than the budget (Yensu, Yiadom, & Awatey, 2016). The management should consider these variances which have an adverse effect.
d) Advice to the management to support their objective
Twin river café is willing to start the business near the airport. The business will be achieving its objective only if the management properly managed their resources and follow the relevant costing approach so that the management can accurately and transparently identify the cost of every variable which is relevant in decision making (Abernethy, & Stoelwinder, 2011). The management should follow the costing approach such as Activity-based costing, target costing, quality management and also prepare the profitability statement so that the company can also identify which product is generating more profit. The company should also select the best supplier of raw material and other product which is used in the production of the final product, who is offering the material of best quality with less cost (Asogwa, & Etim, 2017).
The management should be advised to focus and consider the following points: