Finance assignment using budgets and variance analysis for business planning

Question

Task: You are required to prepare and present a static budget and a flexible budget and compare the actual performance of the business with budget estimates in your finance assignment. IncludeMaster budget, Actual performance, Flexible budget, Different measures of variances, andBreakeven point assessment.

Answer

Introduction
In this finance assignment, the budget will be prepared, and then the budget results will be compared with the actual performance of NAVs. Also, the variance in the actual performance with the budgeted performance will be interpreted and explained in the finance assignment. After which, the breakeven analysis will be done, and its implication of it will be discussed in the finance assignment.

Comparison and discussion of the performance relative to the budgeted estimates in the finance assignment
The static and flexible budget and actual performance results, referred to in this part,are given in the appendix of the finance assignment.

omparing the budgets, including static and flexible, with actual performance shows that the actual result of NAVs is significantly different from the budgeted result.

The first and foremost difference found in the finance assignment after comparison of the actual performance with the budgeted result is that the actual price at which NAVs has sold its soft toys is significantly lower than what was budgeted for. It was budgeted that each soft toy would be sold for $90, whereas on average, the soft toys are estimated to be sold for around $80.63. This lower selling price of soft toys compared to the budgeted selling price led to higher actual sales volume than expected under the business's budget. It was estimated under the budget that NAVs would sell 10,000 units of soft toys, but the business has sold 11200 units. Therefore, this lower selling price helped the business generate higher sales volume than expected. It is found in this finance assignment that this also led to the actual sales amount being slightly higher targeted sales amount under a static budget but lower than the targeted sales amount under a flexible budget.

Another difference which can be seen is that the actual variable cost per unit of NAVs is slightly lower than what was budgeted for. This is mainly due to the actual direct material for fiber and stuffing cost per unit being lower than budgeted. Also, the variable overhead cost per unit in actual performance is lower than the budgeted variable overhead cost. As per the finance assignment findings the direct material cost per unit of cotton was higher in actual performance than the budgeted level, but the amount of direct cotton material that NAVs required was lower than the budgeted quantity, leading to the direct material cost for cotton being lower in the actual result than budgeted under flexible budget. All these lower direct material costs for fiber and stuffing and variable overhead costs per unit lead to the total variable costs per unit, resulting in lower than budgeted level. Therefore, the actual variable cost level of NAVs is lower than budgeted.

The fixed overhead cost of NAVs as per the finance assignment is lower under the actual performance than the budgeted level by $500. Therefore, this also helped to lower the total cost of NAVs being lower under the actual performance than the flexible budget level.

The last significant difference in the actual performance compared to the budgeted result mentioned in the finance assignmentis that the profit that NAVs have generated is lower than the targetted profit under a static and flexible budget. This lower profit, despite incurring lower costs than budgeted under a flexible budget, is due to the business selling its soft toys at a significantly lower selling price than what was budgeted for.

Identification, discussion, interpretation and explanation of the observed variances in the finance assignment
The variance measures calculated for NAVs in the finance assignmentalso show a significant difference between the actual and budgeted performance. In termsof direct material, the price variance of the business was higher than estimated, but the efficiency variance was better. This indicates that the price paid for the direct material is higher than budgeted, but lower direct material was required due to high efficiency (Grubisic, & Galzina, 2019). The variable overhead variance analysis performed in the finance assignmentshows that the cost rate, which is paid per unit, is higher than estimated, but efficiency variance is positive, which means lesser variable overhead used than budgeted. The fixed overhead variance analysis shows that the cost level of fixed overhead was $500 lower than budgeted which shows efficiency in the fixed cost management (Hansen, Mowen & Heitger, 2021).

Comment on the breakeven analysis – what are the implications for a business
The breakeven analysis of NAVs performed in the finance assignmentshows due to NAVs selling their soft toys at significantly lower selling prices than budgeted for, the contribution margin per unit of the business has declined and become significantly lower than what was budgeted for. The implication of it on the business is that the breakeven point in units of it has increased to 3844 units from 3153units under budget. Therefore, the company has to generate a higher level of sales than budgeted to recover all its costs. This increases the financial risk of the business. However, it can be seen that the breakeven point in units of NAVs is still significantly lower than the actual sales volume of the business. This implies the business is still significantly profitable(Niu, Saediman& Surni, 2016). On the other hand, it can be observed in the finance assignmentthat the breakeven point in sales amount that NAVs has to generate to recover all its cost is lower than budgeted(Kampf, Majerák & Švagr, 2016). This is due to the lower cost level of the business under actual performance than what was budgeted for. This implies the business is more cost-effective than what was estimated, and this lower cost level makes the business more competitive in the market.

Also, the margin of safety of NAVs in terms of both sales unit and sales amount is lower in actual performance than what was budgeted for. This implies that the business's financial risk is higher than estimated as the margin of safety calculates the difference between the actual sales performance and the breakeven point of the business, and the larger the difference, the better financially stable the business is estimated to be (Arfianti&Reswanda, 2020).

The breakeven point analysis referred to in this finance assignmentis given in the appendix.

Conclusion
It is concluded from the finance assignmentthat by reducing the selling price, NAVs is able to generate higher sales volume than budgeted, but due to this lower selling price, the profit and margin of safety of the business have declined. Also, some inefficiencies in the management of the cost have been found, and therefore, the performance of the business has not been found to be adequate.

References
Arfianti, U., & Reswanda, R. (2020). Break Even Point Analysis As A Basic of Profit Planning In Handal Insan Sentosa Batik Business. Quantitative Economics and Management Studies, 1(3), 187-193.
Grubisic, A., & Galzina, F. (2019). DEMI MODELSAPPLICATION IN VARIANCE ANALYSIS. Economic and Social Development: Book of Proceedings, 47-58.
Hansen, D. R., Mowen, M. M., & Heitger, D. L. (2021). Cost management. Cengage Learning.
Kampf, R., Majerák, P., & Švagr, P. (2016). Application of break-even point analysis. NAŠE MORE: znanstveni asopis za more i pomorstvo, 63(3 Special Issue), 126-128.
Niu, E., Saediman, H., & Surni, S. (2016). Break Even Analysis of Poultry Egg Production in Rural Area in Southeast Sulawesi. Binus Business Review, 7(3), 227-232.

Appendixof the finance assignment
Static budget, Flexible budget and actual performance