final project : Budget analysis

ACC 202: Final Project Part I Budget Variance Report Submission

Joseph Aguirre

Southern New Hampshire University

The assignment relates to the budget and variance analysis of Peyton Approved. The Excel file provides the complete calculations and details of the budget. Then variance analysis was done by comparing the actual results with the budgeted figures.

The results were as follows:

Peyton Approved
Budget Variance Report
For the Year Ended …
	Actual Results	Static Budget	Variance	Favorable/ Unfavorable
Direct materials variances
Cost/price variance	240,250	240,250	-	Zero variance
Efficiency variance	240,250	232,500	(7,750)	Unfavorable
Total direct materials variance	480,500	472,750	(7,750)	Favorable
Direct labor variances
Cost /price variance	495,000	528,000	33,000	Favorable
Efficiency variance	528,000	480,000	(48,000)	Unfavorable
Total direct labor variance	1,023,000	1,008,000	(15,000)	Unfavorable

The main reasons for the above variances are as follows:

Material Variances

Direct material price variance is the difference between the standard and actual cost per unit of the direct materials purchased, multiplied by the standard number of units expected to be used in the production process. The cost/ price variance is zero, which indicates that there has been no change in the per unit cost of material during the period

Also, the material efficiency variance is the measure of difference between the actual quantity of material utilized during the period and the standard consumption of material for the level of output achieved. The efficiency variance as shown above is unfavorable, this indicates that the management is not keen on purchase of materials, they purchase materials of lower quality than the standard, there is use of unskilled labor and also there is increase in material wastages due to depreciation of plant and equipment.

Labor Variance

Cost/ Price Variance refer to the measure of difference between the actual cost of direct labor and the standard cost of direct labor utilized during a period. The favorable labor rate variance suggests cost efficient employment of direct labor by the company. It indicates that the company hires more un-skilled or semi-skilled labor, and additionally there is a decrease in the overall wage rates in the market due to an increase in the supply of labor. On the other hand, the unfavorable labor efficiency variance may have been caused by hiring of more skilled labor than anticipated in the standard, inefficient hiring by the HR department and also there must have been some possibilities of effective negotiations by the labor unions.

Recommendations for Change

On the basis of above, the company should try to improve the labor efficiency by providing employees with proper training. The HR department should improve on selection and recruitment of employees to ensure efficient utilization of job time and reduce wastages to an accepted level. Also, the company should find suppliers of raw materials that provide quality materials at lower price, and or they should try to purchase materials in bulk so as to take advantage of discounts. It will also be very necessary for the company to dispose of the old plant and equipment so as to acquire the modern machines which would lead to an efficient production and therefore saving on cost.

Conclusion

Budget construction and variance analysis are some of the best accounting techniques that enable the business to analyze the resources at its disposal and make changes where applicable. Peyton Approved should make adjustments to its labor selection, recruitment and training. It should also be keen on suppliers of raw materials so the company works effectively. It would also be prudent for Peyton Approved to assess the efficiency of its machines and if need be replace the old ones with the modern machines.

References

Nobles, T. L., Mattison, B. L., Matsumura, E. M. (2014). Horngren’s financial and managerial accounting (4th ed.). Upper Saddle River, NJ: Pearson Education, Inc.