2. C A S E S T U D Y
You own a small travel services business.
It is the middle of Month 2 of your financial
year and your accountant has just given you
the results for Month 1 and the latest sales
forecast for Month 3 (next month).
Phasikon Ketrat 43889 2
Months vs. Profit/Loss
Month 1 Month1 Month 2 Month 3
Budget Actual Budget Budget
Sales $50,000 $45,000 $50,000 $37,500
Purchases 22,000 20,000 22,000
Advertising 500 2,000
500
500
Cleaning costs 500 500 500
Office supplies 2,000 1,750 2,000
Repairs &
Maintenance
1,000 3,000 1,000
Telephone and
postage
1,500 1,000 1,500
Wages & on-costs 10,000 10,000 10,000
Profit (or Loss) $12,500 $6,750 $12,500
3. a. Refer to the table on the previous slide, identify and report the
deviations (favorable or unfavorable variances) for actual to
budget for month 1?
T h e r e p o r t s h o w f o l l o w i n g
v a r i a n c e s
Sales were showing unfavourable variance, it was expected to be $50,000 but actual was
$45,000 so target of sales was not met according to the budget.
Purchases were having favourable variance of $2,000 which means either a new supplier was
approached or may be the new contract was signed with lower prices against budget.
Advertising also shows unfavourable variance of $2,000 the reason could be heavy
advertisement or may be this amount of $2000 was paid for a period of some months like
6months or a year.
Office supplies show favourable variance of $250, may be due to less wastage
Repair and maintenance is having unfavourable variance of $2000 which shows there were
some major repairing took place.
Telephone and postage show favourable variance i.e. $500 may be because most of the
clients prefer email communication or may be a new courier company has been contacted
for postage services with lower prices.
The overall impact on profit is with $5,750 against the expected profit of $12,500.
Phasikon Ketrat 43889
3
Months vs. Profit/Loss
Month 1 Month1 Variance
Month 1
F/UF
Budget Actual
Sales $50,000 $45,000 $5,000 UF
Purchases 22,000 20,000 $2,000 F
Advertising 500 2,000 ($1,500) UF
500 ($500)
Cleaning costs 500 500 $0
Office supplies 2,000 1,750 $250 F
Repairs & Maintenance 1,000 3,000 ($2,000) UF
Telephone and postage 1,500 1,000 $500 F
Wages & on-costs 10,000 10,000 $0
Profit (or Loss) $12,500 $6,750 $5,750 UF
4. b. In what areas do you feel corrective action may be
required? Please provide one example of corrective
action for each identified area!
Following are the corrective actions suggested.
Sales needs to be forecasted on realistic assumptions to avoid such
unfavourable variance for example if you see that in actual month you are
unable to achieve 50000 update the budget according and do not keep
forecasting 50000 for coming month where you are sure you can’t earn this
much
Need to allocate funds on advertising realistically or do not take decision for
advertising abruptly like get the additional flyers print while the previous
stock still there in store
Maintenance and repair allocation should have a buffer i.e. some additional amount so if any
unforeseen incident happens with the plant and equipment it can be easily absorb in
maintenance and repair expense.
4
5. c. Your number one priority is to maintain a
sufficient profit in your business. Given the
reviewed sales forecast for Month 3, plan the
reallocation of funds for Month 3 if you still wish
to achieve the same profit as in Month 2.
Please explain how would you decide which areas
to reallocate?
The sales forecast for the month 3 is
showing $37,500 which is equal to the
forecast of expenses for the Month 2. So if
we want to maintain the same profit as in
month 2 we need to re-review the sales
forecast for the month 3 and raise the
targets. And if I base my forecast on actual
figures of month 1 there even the expenses
were $38,750. So according to my
understating re allocation would be in
Purchases, repair and maintenance and
telephone and postage areas. The budget
after re allocation and re-review or raise of
sales forecast would be;
Reason for reallocation ;
The actual purchases in Month 1 was
20,000 so we can maintain it as it
The actual repair and maintenance for
month 1 was 3000 so i want to keep it as
it is because this area is quite
unexpected, and we could end up with
any issue with machinery any time
• Telephone and postage is also very
important area and we could not
compromise here therefore it also
needs to be based on actual figures of
month 1.
Phasikon Ketrat 43889 5
Months vs. Profit/Loss
Month 2 Month 3
Budget Budget
Sales $50,000 $50,000
Purchases 22,000 20000
Advertising 500 1000
Cleaning costs 500 500
Office supplies 2,000 2000
Repairs & Maintenance 1,000 3000
Telephone and postage 1,500 1000
Wages & on-costs 10,000 10000
Profit (or Loss) $12,500 $12,500
6. d. You have decided to organize a meeting with your
colleagues where you are required to present and discuss
changes to income and expenses prior the implementation.
In your meeting you must address the following points:
Phasikon Ketrat 43889 6
• This budget is prepared on the basis of current organizational
objectives and financial targets and fund allocations are made based
on the assumption that we will be achieving our organizational
targets through this budget. this budget is developed by keeping
following considerations;
Relevant departments were concerned for costs and
prices
Historical data was obtained from relevant departments
to analyse past trends
Market conditions are discussed with relevant
stakeholders
Government institutions or official sites are explored for
future tax and duties structure
• No budget is accurate and 100% matched with actual figures
because of the many factors business is facing internally as well as
externally. So the possible reasons for the deviations of certain costs
and expenses will be included;
Suppliers or vendors raise prices
Competitors are active in market and earning our clients
Economic situation of the state isn’t favourable
Major renovation or maintenance work is occurred
Additional staff is hired
Labour hours are increased
Sudden or unforeseen events
Advise the staff and colleaguesof the budget statusin relation to the targets
Identify potential reasonsfor the deviations
Explain the optionsfor effective management of the deviations
Inform them about your decision regardsto resource allocation
Promote the importance of budget control and monitoring
Discussthe strategies, control systemsand recordsused to monitor the budget
What strategiescould you implement to monitor resource usage throughout Month 3?
How would you involve the staff in the budget planning, implementation and review
process?
How would you keep the staff informed of any changesto the allocation of resources?
What isthe importance of the budget control?
Prior to conducting the meeting, you must make notesof the above pointsyou are
going to discussand get approval from your assessor to ensure that the ideasare you
won.
7. d. You have decided to organize a meeting with your
colleagues where you are required to present and discuss
changes to income and expenses prior the implementation.
In your meeting you must address the following points:
Phasikon Ketrat 43889 7
A realistic budget cannot be prepared without getting relevant people
involved in budget planning and implementation therefore this meeting is
very important for us to come up with a budget that will assist us in achieving
organizational targets.
• All of you are invited to provide your experienced and worthy opinion and
suggestions regarding budget and raise your concerns.
• Resource allocation is made as per the information provided by
departments. It is a draft budget and you are required to review this
budget with us so we can finalize these allocations and finalize the budget.
• Approved budget will be shared with all the relevant departments so they
can stay aware of the allocated funds and do not go out of budget
unnecessary. If the deviation is must due to some situations it is
recommended to escalate this variation to the relevant senior manager so
it can be taken care of.
Budget is a live document and we could change it if the need be and it is
based on the situations, like sometimes we can avoid situation or can’t do
anything else except go with the flow so in this situation the best solution is
to change the budget and get it approved from the CEO. If such changes
would happen all the stakeholders will be informed and provided with the
changed or updated budget.
• It is recommended to monitor the budget and stay connected with the
budget so the actual spending can be controlled. Budget is the best tool to
keep our spending in control. It will also assist in using resources in
efficient manner and fewer resources would be wasted. This exercise will
make our budget realistic and accurate to some extent.
• Monthly internal review of budget is recommended within department and
quarterly budget review report is required to be submitted to the CFO and
CEO.
Advise the staff and colleaguesof the budget statusin relation to the targets
Identify potential reasonsfor the deviations
Explain the optionsfor effective management of the deviations
Inform them about your decision regardsto resource allocation
Promote the importance of budget control and monitoring
Discussthe strategies, control systemsand recordsused to monitor the budget
What strategiescould you implement to monitor resource usage throughout Month 3?
How would you involve the staff in the budget planning, implementation and review
process?
How would you keep the staff informed of any changesto the allocation of resources?
What isthe importance of the budget control?
Prior to conducting the meeting, you must make notesof the above pointsyou are
going to discussand get approval from your assessor to ensure that the ideasare you
won.
