Task 1 (T1): Purpose of The Budgeting Process and The Variance Analysis 

1. Budget is a component of cost management practice by the respective sectors. It consists of planned volume of sales, expenditure, costs and profits of the industries. It is made for a particular period of time. This is used to compare with the actual operations of the businesses so that the industries can find out their mistakes. In other words, it is a strategic planning by different sectors like organisations, families, industries. It tells us the proposed allocation of money and the meanwhile expenditure to be made.

Budgeting has made the tourism industry to flourish. With the help of budget, the industry set its target and tries to achieve it. Budget is like a benchmark use to measure the performance and setting up of financial targets. It is very important to decide the budget before planning for a trip. In order to minimise the costs, and maximise the hard earned money the traveller has to plan for the trip. Thus, the tourism industry has to make plans for the trips and make a complete analysis of the costs and profitability.

In the case of hospitality industry, the benefits of budget are huge. It is used to forecast and set standards for the hoteliers. This can be used to compare the actual operations with the set standards. With the help of budget, the hotels can manage their hotel expenses and thereby look after the profitability of the property. The budgeting is widely used in this industry after the booming of tourism industry. Earlier, the research in the hotel industry was limited but after the coming of budgetary practices, the assignment of researchers in this budgetary practices significantly increased. In the industry like hotels, where the source of income is by providing temporary lodging; budget helps to manage the expenditure and tells how to increase the wealth and interests of shareholders of the industry. Budget is like a plane flight by the pilot, who knows where to steer the plane in order to fulfil a particular goal. Without the help of budget, it is difficult to know the risks and cost of the industry which it is going to face in the future. Therefore, the budget provides a sketch to the hoteliers. Also, the increased services provided by the hotels has made budget mandatory for this industry.

2. Due to the increased competition faced by the organisations, it is necessary for them to use financial performance measures. Financial performance tells the company how to use its assets in the best possible manner and to generate revenues. The measures are given in the financial statements of the company like the income statement, cash flow statement, and the balance sheet.

These statements can be used in several manner through calculation of ratios. This can tell us how the company will grow and reach its goal. For example, the trend analysis (horizontal analysis) can be made to look after the changes made and how the changes will look in the financial statements (whether profitable or not). Vertical analysis can let us know about the costs and revenues and what changes can be made to improve the statements. There are many ratios used to determine the financial health of a business. Ration analysis, like working capital ratio tells us the whether the company has sufficient capital assets to pay it’s current liabilities.

Despite the various benefits of financial performance measures, there are also some shortfalls. Financial performance measures focus on short term benefits of a company. They concentrate on the short term goals rather than looking at long term objectives of the company. Also, they do not show the full picture of the business condition and manipulation is made. The non financial performance measures and quality measures are also excluded.

Task 2 (T2): Variance Analysis for one Event & Recommendations

ii. Typically, variances explain the difference between the standard and actual costs. The various quantitative causes of variance can be due to change in preferences of the customers which changes the demand, or change in supply due to shortage of some inputs etc. The direct qualitative reasons for labour efficiency variance are overstaffing or understaffing and the number of hours worked by the workers. The variance can be divided into two categories: one is favourable and the other is unfavourable. Favourable variances refers to the situation where the actual costs are less than the costs estimated in the budget whereas unfavourable variance refers to the situation when actual costs are more than the estimated cost in the budget. Lack of training to workers, poor working conditions, appointing low grade workers, use of defective and low quality of machinery and equipment, inefficient communication and poor instructions are some of the qualitative causes of the unfavourable variance.

In our case, we observe fixed overhead variance which is unfavourable. This is caused due to the difference between actual fixed overhead and the standard (budgeted) fixed overhead for actual output. The actual fixed overhead was more than the standard and thus adverse variance is observed. This can be due to the inefficient technology used by the company. Also, we observe an unfavourable sales variance, which tells us that the budgeted sales was more than the actual sales. The reason could be that the prices are too high or the quality of the product is poor.

iii. To find out the ways to prevent the variances, we need to consider that whether the variances are favourable or unfavourable. It is not every time that the variances are bad for the company. If there is favourable variance then, the situation is not worse. It can be corrected by changing our beliefs about the condition of our business. Whereas, in the case of unfavourable variances, we can try to adjust our budget to be more realistic. We should reconsider our budgeted volume of sales, costs, revenue and profits. We should try to increase the demand by modifying our product. Thus, we can make the process more efficient and effective.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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