Module 4 - Case BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS ASSIGNMENT OVERVIEW T&P Fashion Shops T&P Fashion Shops is a new chain that operates 10 stores in major malls throughout the United States. Each store manager is responsible for pr

Running head: BUDGETS

BUDGETS 4

BUDGETS

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Introduction

The choice of the budget to be used is at the discretion of the manager. It is upon them to come with a realistic yardstick that can be used to establish the real costs and revenues in any business. It is important for the budget levels of the actual performance and the budgeted ones to be established. This will determine whether the firm will resolve to the use of a static or a flexible budget in their performance evaluation. This paper looks at budgets and variance analysis in a business.

Static budgets are prepared at the specific level of production. The managers estimate that the actual business performance will be at the particular level. In cases where there is a change in the actual level of production the managers use the planned costs without making any changes. Related revenues and expenses are compared to establish the various variances in the business. The favorable variances are encouraged while the adverse ones are corrected and looked into.

Flexible budgets are a modification of the static budgets. The actual level of production is used to prorate the respective costs and revenues (Garrison et al. 2010). This makes sure the expenses and the incomes in the budget documents are at the same level as the actuals. This makes the variances realistic as the budgeted and the actual level of production is the same. Businesses have been keen on the use of flexible budgets as compared to the static budgets.

The variance analysis is best for any business. This is because the analysis enables the business to identify its performance. The management is able to set the targets in the budgets and establish whether the business has met them or not. Besides, it facilitates the corrective mechanism. This is put in place to make sure the unfavourable variances are looked into and the right action taken. The favorable variances are noted and the various individuals rewarded accordingly. Furthermore, this analysis plays a crucial role in the controlling of costs in a company. This is integral especially for companies with cost leadership strategies.

Variance analysis only focuses on the financial criteria as the yardstick for performance. This ignores the other factors that are crucial for the performance of the business. The workers may be demotivated especially when they have adverse variances caused by issues that are beyond their category. Those employees such as the subordinates whose work is not related to costs and revenues may not be compensated and rewarded for their job.

Conclusion

A business stands to benefit from the use of a flexible budget as compared to the use of a static one. The use of a similar level of production implies that the business will be comparing apples to apples. This will facilitate the formulation of the right decision making in coming up with the right financial policies. Besides, a business that applies the variance analysis stands to benefit in the form of cost control and goal setting. Such a firm is able to achieve its set goals.

References

Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793.