Variance Analysis and Flexible Budget

Question: Discuss about the Variance Analysis and Flexible Budget. Answer: Introduction The increased competition has forced the organizations to put in extra efforts to control the cost and improve the financial performance of the business (Berger, 2011). In the context of this, the report presented here deals with the analysis of the financial performance of Wildwood Creations Ltd for the financial year 2015-16. Comparing the budgeted figures against the actual, an extensive analysis has been performed to find out the variances and the reasons for such variances. Further, the report also covers discussion on the flexible budget being prepared for the company for the financial year 2015-16. Budget Vs Actual and Variance Analysis The company planned to operate at the capacity of 17,060 hours for the financial year 2015-16. At this capacity level, the planned revenues of the company were $947,800 with the expectations of earning $19,191 as net profit after meeting all the costs (appendix-1). However, when the actual financial performance was compared with the budgeted, it was found that the company was short by $2,917 in achieving the profits. The variance analysis was conducted to find out the reasons for the differences in the budgeted and actual profit. The variance report indicates that the revenues of the company increased by $55,390 but despite that the net profit reduced by $2,917 (appendix-2). The reduction in profit was mainly due to increase in the costs such as salaries for major repair services, material for new tables, advertisement, and office rent. Among these the biggest variance was observed to be in the salaries for major repair services, which were found to be over spent by $48,552 (Appendix-2). The actual hours worked for the financial year 2015-16 were 19,543, which exceed to the budgeted hours by 2,483 hours. The salaries for major repairs were payable on per hour basis, which implies that these were variable. Due to of being variable nature, the excess actual hours increased the spending on salaries for major repairs substantially in the financial year 2015-16. Flexible Budget The flexible budget for Wildwood Creations Ltd for the financial year 2015-16 has been shown in appendix-3 (Crosson Needles, 2010). The flexible budget depicts that the revenues of the company should have been $1,149,199.42 at the actual capacity utilization. Although, the actual revenues are greater than the budgeted figures, but, since the actual hours worked have increased to 19,543, the revenues of the company should have increased to $1,149,199.42. Further, the total variable cost was budgeted at $902,016, which, having regard to the increment in the capacity level should have been 1,033,300.04. However, since the fixed costs remain the same, therefore, the fixed costs do not change in the flexible budget (Crosson Needles, 2010). The total profit as per flexible budget is $34,699.80, which is greater than the budgeted profit of $19,191. Conclusion From the analysis, it could be articulated that the companys financial performance has been poor in the financial year 2015-16. At the actual level of capacity utilization, the company should have achieved a profit of $34,699.38 while the company earned only $16,274. In order strengthens the financial performance; the company should lower down the salary cost incurred on major repairs. For this purpose, the company can consider switching from contract base work to permanent salaried employees who will be paid on a monthly basis. References Berger, A. (2011). Standard costing, variance analysis and decision-making. GRIN Verlag. Crosson, S.V. Needles, B.E. (2010). Managerial accounting. Cengage Learning.