tlip5035a presentation 9
TRANSCRIPT
PRESENTATION 9 OUTLINE
The following areas are covered in this presentation:
• Performance Monitoring and Variance Identification
• Variance Analysis
• Calculating Variances
• Analysing Variations
PERFORMANCE MONITORING AND VARIANCE IDENTIFICATION • Performance is best monitored continuously via a budget report that shows
variances between what has been budgeted for and what is the actual
revenue and expense
• The use of a spread sheet as a budget performance report is useful in
being able to spot variances immediately.
• Variances can be favourable and unfavourable and have the opposite
meaning for revenue and expense.
Favourable variance in revenue: sales higher than
budgeted for
Unfavourable variance: actual revenue is less than budgeted
amount
Expense variances: favourable if they are less than budget, unfavourable if they exceed
budget
PERFORMANCE MONITORING AND VARIANCE IDENTIFICATION
• It is ideal to be able to identify variances on a real-time basis, in
other words on an evolving budget spread sheet or report.
• A budget spread sheet set out for a twelve-month period will have
the actual figures for income and expenses (both fixed and
variable) entered on a monthly basis. Any variances can be
calculated immediately. Year-to-date variances will also be shown
and any trend can be spotted.
• A manager will also have a tolerance for variance level and the
number of concurrent variances in the same account. Naturally
any large variance must be investigated quickly but small
variances that occur infrequently may not require any action
PERFORMANCE MONITORING AND VARIANCE IDENTIFICATION • A section of a budget spread sheet is show below
INCOME JUL AUG SEP OCT
storage $30,000 $40,000 $35,000 $36,000
unpacking $2,000 $1,000 $2,000 $2,000
lift on lift off
$3,000 $1,000 $1,500 $2,000
other
TOTAL $35,000 $42,000 $38,500
BUDGET $35,937.5 $35,937.5 $35,937.5
Variance -$938 $6,063 $2,563
Variance % -2.6% 16.9% 7.1%
PERFORMANCE MONITORING AND VARIANCE IDENTIFICATION
INCOME JUL AUG SEP OCT
storage $30,000 $40,000 $35,000 $36,000
unpacking $2,000 $1,000 $2,000 $2,000
lift on lift off $3,000 $1,000 $1,500 $2,000
other
TOTAL $35,000 $42,000 $38,500 $40,000
BUDGET $35,937.5 $35,937.5 $35,937.5 $35,937.5
Variance -$938 $6,063 $2,563 $4,063
Variance % -2.6% 16.9% 7.1% 11.3%
Budgeted income per month is $35,937.50 from all sources
Income for July is under and shows a negative variance of 2.6% and is
therefore unfavourable
August revenue has revived and is above budget by 16.9%
The revenue for the following two months is also above budget.
PERFORMANCE MONITORING AND VARIANCE IDENTIFICATION
• Lets look at the expenses budget section of the spread sheet
• You will notice an increase in accountancy over budget for one
month before it returns to budget
BUDGET BUDGET ACTUAL
EXPENSES ANNUAL MONTH JUL AUG SEP OCT
accountancy $2,060 $171.7 $200 $171.7 $171.7 $171.7
advertising $300 $25 $100 $0 $0 $100
bank fees $300 $25 $20 $30 $28 $30
casual labour $1,500 $125 $0 $0 $0 $0
computer/office
$1,000 $83 $0 $200 $45 $50
PERFORMANCE MONITORING AND VARIANCE IDENTIFICATION
• Lets look to the end of the year to see if any of these items
showed annual variances
• Accountancy expense shows that accountancy was over budget by
0.7%. As it is over budget and an expense it is considered a
negative (unfavourable) variance. Advertising however remained
completely on budget over the year (i.e. the budget allowed $300
annually and actual cost was also $300), which for an expense
item is favourable behind being under budget.
APR MAY JUN Year to Date VARIANCES %
accountancy $100 $100 $171.7 $2,074 -$14 -0.7%
advertising $0 $0 $0 $300 $0 0.0%
bank fees $20 $25 $35 $313 -$13 -4.3%
casual labour $0 $0 $0 $2,250 -$750 -50.0%
VARIANCE ANALYSIS• Variances are analysed as a method of ascertaining the level of
achievement of planned budgets. This needs to be done as the
budget unfolds, usually over a monthly period.
• Longer periods are accepted but there is little point in doing the
analysis of variance at the end of the year, especially if the variances
have resulted in a negative impact on the company’s financial
performance
• Variance analysis will lead to possible solutions to problems that were
not known at the time the budget was being put together, or are
indicative of trends that have crept in over time.
• Reasons for variances in sales revenue are usually due to lower
volumes sold, or lower prices charged than was budgeted. This may
require the budget to be altered to reflect such trends. The reasons
behind lower sell prices also need to be investigated.
VARIANCE ANALYSIS
• Overall variance analysis needs to be looked at (usually by
managers) to spot any trends, especially those resulting in higher
overheads and costs and lower sales revenues.
• Both trends have negative impacts on a business. Remedial action
also needs to be timely, hence the need for rapid inflow of
accounting information to enable the budget to be watched and
analysed.
VARIANCE ANALYSIS
Example 1
• Navigate to the waste disposal result below from the budget
spread sheet shows a major variance (negative) of 260%
• Clearly, a major rethink is required for next year’s budget when
assessing this particular expense. If this account had been looked
at midyear, it would show that it was already running well over
budget. At that time an adjustment should have been made to the
budget.
Year to Date VARIANCES %
waste disposal $1,800 -$1,300 -260.0%
workcover $10,300 $0 0.0%
VARIANCE ANALYSIS
Example 1
• In terms of risk assessment and contingency plans, this example
indicates that the risk as identified has been accepted instead of
avoided, controlled or transferred.
• The actual reason for an increase in waste disposal charges may
well be a result of an extra activity within the company and
possibly can be charged back to clients.
• All variances of such a magnitude need investigation in any case.
The actual amounts themselves are small in terms of the overall
turnover of the company too. The contingency plans may include a
charge back option in addition to an increase to the expense
budget.
VARIANCE ANALYSIS
Example 2
CJS Plastics (Drums) Monthly Sales Budget 2012-13
MONTH JULY AUG SEP YEAR
Past pattern of sales
5.8% 8.1% 9.2% 100%
Large Drum Sales 12 16 18 200
Price $600 $600 $600 $600
Revenue $7,200 $9,600 $10,800 $120,000
Small drum Sales 20 28 32 350
Price $400 $400 $400 $400
Revenue $8,000 $11,200 $12,800 $140,000
TOTAL REVENUE $ 15,200 $ 20,800 $ 23,600 $260,000
VARIANCE ANALYSIS
Example 2
• Performance should be monitored continuously, and systematically,
but HOW OFTEN should performance be monitored?
• This is a matter of judgement, depending on the nature of the
organisation. Performance could be monitored quarterly, monthly, or
weekly. Managers can monitor the performance of a business by
comparing actual performance against the targets contained in the
budget.
• A budget “variance” is the difference between planned and actual
performance. Managers monitor variances to make sure that costs
do not run out of control, profit targets are kept in mind, and to
identify circumstances where the business strategies might need to
be reviewed.
VARIANCE ANALYSIS
Example 2
CJS Plastics (Drums) Monthly Sales Budget 2012-13
MONTH: JULY Budget Actual
Past pattern of sales 5.8%
Large Drum Sales 12 14
Price $600 $600
Revenue $7,200 $8,400
Small drum Sales 20 17
Price $400 $400
Revenue $8,000 $6,800
TOTAL REVENUE $ 15,200 $15,200
CALCULATING VARIANCES
Step One: Calculate the Variances
Variance = Actual – Budget
CJS Plastics (Drums) Monthly Sales Budget 2012-13
MONTH: JULY Budget Actual Variance
Past pattern of sales 5.8%
Large Drum Sales 12 14 2
Price $600 $600 $0
Revenue $7,200 $8,400 $1,200
Small drum Sales 20 17
Price $400 $400
Revenue $8,000 $6,800
TOTAL REVENUE $ 15,200 $15,200
CALCULATING VARIANCESStep Two: Calculate the percentage (%) variances
CJS Plastics (Drums) Monthly Sales Budget 2012-13
MONTH: JULY Budget Actual Variance Variance %
Past pattern of sales 5.8%
Large Drum Sales 12 14 2 17%
Price $600 $600 $0 0%
Revenue $7,200 $8,400 $1,200 17%
Small drum Sales 20 17 -3 -15%
Price $400 $400 $0 0%
Revenue $8,000 $6,800 -$1,200 -15%
TOTAL REVENUE $ 15,200 $15,200 $0 0%
% Variance = (Actual – Budget)
X 100Budget
ANALYSING VARIATIONS• Budgets are not a forecast of future performance. Budgets are a ‘plan
of action’ for future performance based on assumptions about future
conditions, therefore variation is to be expected!
• Variations are examined to help keep the plan on track, or If
circumstances have changed, to adjust the plan accordingly (apply
contingencies).
• Variations are often coded as either:
− F = Favourable
− U = Unfavourable
• Variations and percentage variations, help draw managers’ attention
to the variations that have the largest effect on the achievement of
the business plan. Small variances can be safely ignored. This is
called management by exemption.
ANALYSING VARIATIONS• Managers need to investigate the CAUSES of variations:
For example:
• Total revenue and the cost of goods sold will be sensitive to changes in the
VOLUME of sales
• Operating expenses will be less sensitive to changes in the volume of
sales.
Total revenue
Variable cost
Fixed cost
Total cost,
Breakeven
CVP Analysis
Total revenue
COGS
Gross profit
Operating expenses
Operating profit
ANALYSING VARIATIONS
• Managers need to consider whether variations in revenue or the
cost of goods sold (the variable costs) are due to:
Quantity (or volume) changes
− Changes in the quantities of goods and services sold
− Changes in the quantities of direct materials purchased or
direct labour employed
OR
Price Changes
− Changes in the prices of goods and services sold
− Changes in the prices of direct materials purchased or direct
labour employed
ANALYSING VARIATIONS
• Managers ALSO need to consider whether variations in revenue or
the cost of goods sold (the variable costs) are able to be
controlled, or not able to be controlled.
• Variance analysis or reporting can be conducted within the
organisation either within the finance department utilising budget
or audit/compliance specialists or from an operational perspective
by the operation manager(s).