In this assignment, CEO of BlindsforShine Limited has evaluated the financial performance on the basis of projected costs and the actual costs. In this assignment, budget report is prepared for the month of November-18. The financial stability of the company has been assessed in context with sales volume variance and flexible budget variance. Favourable variance in terms of revenue signifies when actual results are more than budgeted results or vice versa whereas adverse or unfavourable variance in terms of expenses signifies when actual results are more than budgeted results or vice versa. The flexible budget variance is computed by comparing actual figures with the flexible budget figures and similarly, the sales volume variance is computed by comparing flexible budget figures with static budget figures. In addition to this, after computation of budget report it has been evaluated that BlindsforShine Limited has adverse position in terms of operating profit which has resulted into worse financial stability of BlindsforShine Limited for November-18 month.
In this case, BlindsforShine Limited manufactures two luxury blinds for residential use as well as commercial use. The annual production and annual sales of the company is estimated 15000 units where 11000 units are for residential purpose and 4000 units are for commercial purpose. Both the actual results and estimated figures are given and also given that ABC costing is used by the firm to allocate costs in order to remain competitive in the market.
- Flexible Budget Variance: Flexible budget variance is computed by taken into consideration both actual results and flexible budget results. Flexible budget is computed by multiplying the actual units of sales, material, labour and variable manufacturing overhead with the standard price. Actual results are computed by multiplying actuals units with the actual price.
- Sales Volume Variance: Sales volume variance is computed by taken into consideration both static results and flexible budget results. Flexible budget is computed by multiplying the actual units of sales, material, labour and variable manufacturing overhead with the standard price whereas static budget is calculated by multiplying the standard units of sales, material, labour and variable manufacturing overhead with the standard price.
There are various of causes of variances which are mentioned below:
The total actual revenues of Residential and Commercial computed are $ 24,47,225. However, the budgeted revenues totalled were $ 25,95,650 and the static budgeted revenues totalled were $ 29,82,850. This has resulted the adverse position in revenue in both flexible budget variance as well as in sales volume variance with $ 1,48,425 and $ 3,87,200 respectively. The main reason of unfavourable variances is because the standard sales units are given as 1010 and 455 for residential and commercial use respectively however the company has sold only 850 and 415 units for residential and commercial use thus resulted into adverse variance.
- Variance in Direct material costs:
In terms of direct material costs, the three types of direct materials are: Fabric, Faux wood and Vinyl. The company has actually incurred direct material costs of $ 7,22,783.50 whereas the company has budgeted the direct material costs to be $ 7,08,861 and static material costs to be $ 6,44,873.75 and hence this has resulted into adverse flexible budget variance of $ 13,922.50 and adverse sales volume variance of $ 63,987.25 respectively. In addition to this, fabric material costs are incurred comparatively less by the company in comparison to budgeted figures while Faux wood and Vinyl material costs are incurred comparatively more in comparison to budgeted figures for both residential as well as commercial use.
- Variance in Direct Labour costs:
In terms of direct labour costs, these are divided into two processes manufacturing and assembly. The company has actually incurred total labour costs of $ 6,22,480 whereas the company has budgeted the direct labour costs to be $ 6,08,684 and static labour costs to be $ 6,19,040 and hence this has resulted into adverse flexible budget variance of $ 13,796 which amounted to 2% and favourable sales volume variance of $ 10,356 which is also 2%. In addition to this, manufacturing labour costs are incurred comparatively more by the company in comparison to budgeted figures while assembly labour costs are incurred comparatively less in comparison to budgeted figures for both residential as well as commercial use.
- Variance in variable overhead:
In terms of variable overhead, it is given that company is currently using ABC for the allocation of budgeted variable overheads. It is observed that company has actually incurred high residential variable overhead as compared to budgeted residential variable overhead by $ 5,641.98 and vice versa for commercial variable overhead. On the other hand, flexible budgeted variable overhead for both residential as well as commercial are comparatively less in comparison to static budget figures. Thus both variances are favourable to the company.
- Variance in total variable costs:
After evaluation of above direct material costs, labour costs and variable overhead it is observed that the actual variable costs amounted to $ 19,95,428.50, flexible budget variable costs amounted to $ 19,71,821.96 and the static total variable costs amounted to $ 20,06108.83 This is resulted into unfavourable flexible budget variance of $ 23,606.54 in total variable costs. Whereas for sales volume variance, it is assessed as favourable position of $ 34,286.57 in total variable costs.
- Variance in total Manufacturing fixed costs:
In terms of manufacturing fixed costs, it is given that actual fixed manufacturing costs given was $ 17,40,000 per year which means November fixed cost is amounted to $ 1,45,000 whereas estimated fixed manufacturing costs given was $ 16,80,000 per year which means November fixed cost amounted to $ 1,40,000. In other words, the company has incurred $ 5000 more in fixed cost as compared to estimated figures which has resulted into adverse flexible budget variance of $ 5000. On the other hand, there is no sales volume variance because both flexible and static fixed costs are same which is considered as favourable to the company.
- Variance in Operating profit:
Operating profit is computed by subtracting fixed manufacturing cost from contribution margin. In this case, actual operating profit amounted to $ 3,06,796.50 whereas the flexible operating profit amounted to $ 4,83,828.04 and static operating profit amounted to $ 8,36741.17. This has resulted into unfavourable variance in both budgets.
Recommendations
After the above computations of variances in different categories it has been evaluated that these are due to demands or due to adverse environments of market. Also given that actual units of sales and selling price are moderately less in contrast to budgeted units of sales and selling price. Thus due to difference in units and selling price, the actual revenues are lower from budgeted figures.
In addition to this, the actual direct material costs of both residential as well as commercial are higher than the static direct material costs. Thus the BlindsforShine Limited needs to consider the decrement in faux wood of residential and commercial and fabric of commercial costs. The labour costs of residential in manufacturing are high but the commercial labour costs are in control. Thus the manufacturing residential labour costs are required to control. In addition to this, variable overhead costs of both residential as well as commercial are less as compared to static budget variable overhead figures.
Actual contribution margin is also less in comparison to static budget contribution margin due to less actual revenues. Given fixed manufacturing costs is constant which seems to be in control. As a result, actual operating profit was only $ 3,06,796.50 whereas the static operating profit amounted $ 8,36,741.17. Thus it is recommended to increase the revenues in order to increase the operating profit.
