Comparison of budget figures to actual and reporting resultant variances both dollar figures and percentage.
Figures to use will be the first quarter of the latest year’s budget that you calculated in A1. You are given actual figures to compare against these figures headings for your spreadsheet.
Example, review financial results below
Description Budget Actual $ Var. % Var. F/U (favourable/unfavourable)
Sales 1,200,000 1,000,000 200,000 16.7 U
Electricity 10,000 8,600 1,400 14.0 F
What are favourable and unfavourable variances?
As we can see from the above examples the difference between actual and budget figures sales actual less than budget (U) due to a potential reduction in sales revenue.
Hang on, electricity actual is less than budget and it’s a favourable variance? That’s because the electricity expense actual is less than the budget.
Remember if in doubt about what budget figure to include refer to the information given in the assessment which will indicate what figures are different to previous budget information or confirm that the same figure can be used in the current budget for example accounting fees.
Explanation of variances for management is a powerful tool to take action for a business to remain viable in the future. Often budget information needs to be reviewed in order to reflect changing business operations and markets that they compete in.
Assessment Requirements
1. Read the case study.
2. Develop a variance report based on the format and template provided by Houzit.
3. Complete a cash flow analysis on the average length of time it takes Houzit to collect funds from its debtors to determine the trend based on the financial reports in Assessment Task 1.
4. Examine the sales budget and profit budget, cash flow budget and debtor ageing summary provided in the case study for the Assessment Task 2 to identify the following:
a. Issues:
i. Identify, describe and prioritise significant issues that are evidenced in the provided case study information and describe reasons or causes of these issues. Discuss issues of financial probity that you have identified or considered when monitoring these budgets.
b. Variances:
i. Complete an actual-to-budget variance report, using the template provided in the case study.
ii. Identify variances by comparing actual results with the established budget, and provide reasons why these variances may have occurred.
c. Performance:
i. Compare financial performance of the organisation (according to financial information provided) to industry benchmarks for this organisation in line with the retail trade sector.
iii. Determine a trend of the average debtor days and the impact to the cash flow of Houzit.
d. Recommendations:
i. Outline your recommendations for ongoing financial viability for the organisation, based on your assessment of the issues, reasons for variances and organisational performance you have identified (Steps 1–3).
ii. Include recommendations on effective management of any relevant contingencies and issues that you have identified above.
e. Evaluation:
i. Provide a summary review of the financial management processes in place for the organisation, in light of your assessment of the issues, reasons for variances and organisational performance you have identified. Include in this section any recommendations you have for modifying management processes.
