Budgeting, variance analysis and performance evaluations

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Business Finance

Description

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 preparing a flexible budget for the store. T&P headquarters accumulates and analyzes the information for each store and in the aggregate.

Below is the forecast (budgeted income statement) for the Houston store showing the breakdown of fixed and variable expenses in columns two through four. The last column shows the actual results.

T&P Fashions - Houston Store
Breakdown of Expenses (Forecast)
ForecastFixedVariableActual
Revenues$1,400,000$1,260,000
Cost of Sales790,000790,000760,000
Gross Profit$610,000$500,000
Management182,000154,70027,300182,000
Shop assistants258,000154,800103,200262,000
Rent23,20018,5604,64022,000
Utilities34,80034,80031,000
Misc. expenses24,50012,25012,25029,000
Total expenses$522,500$526,000
Net income$87,500$(26,000)
==================

Additional Information

  • Variable expenses are based on revenues and we assume that the percentage remains constant for flexible budgeting purposes.
  • Fixed costs are all within the relevant range.
  • Other expenses are all specific to this store. Headquarters pay for marketing and corporate overhead expenses.

Case Assignment

Required:

Computations (use Excel)

  1. Prepare a flexible budget and show variances for the year that passed. Indicate whether the flexible budget variances are favorable or unfavorable.
  2. Headquarters are contemplating charging each store a 5% marketing expense based on sales. How will that affect the operating profit of the store and the money available for managerial bonuses based on actual results for the past year? Summarize the information in a table.

Memo (use Word)

Write a 4- or 5-paragraph memo to the division manager explaining the flexible budget variances; how to interpret the information and what action, if any to take. Comment on the 5% marketing proposal too. Start with an introduction and end with a recommendation. Each of the four or five paragraphs should have a heading.

Short Essay (use Word)

Start with an introduction and end with a summary or conclusion. Use headings.

  • Discuss how to interpret static and flexible budget variances.
  • What are the benefits of variance analysis? How can such analysis be detrimental rather than beneficial to the organization?

Assignment Expectations

Each submission should include two files: (1) An Excel file and (2) a Word document. The Word document shows the memo first and short essay last. Assume a knowledgeable business audience and use required format and length. Individuals in business are busy and want information presented in an organized and concise manner.

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Explanation & Answer

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Running head: MEMO AND ESSAY

1

Memo and Essay
Instructor name
Student name
Date

MEMO AND ESSAY

2

MEMO
To: The Division Manager
From:
Date: 2nd February 2018
Subject: Reasons for Flexible Budget variances and reasons for this.
Variance in accounting term means the difference between the actual performance and budgeted
performance of the company. The revenue forecasted for the company is $1,400,000 whereas the
actual revenue comes out to be $1,260,000. The actual cost of sales reported is $760,000 which
is $30,000 less than the budgeted cost of sales i.e. $790,000. The unfavorable variance indicates
that the company needs to work on some of the important aspects of the production like shop
assistants and revenue which are not as per the budgeted amount. The management should make
sure that the figures for the next period should be thoroughly planned in terms of price as well as
the quantity of the raw material required.
The other important component of the budget is the cost of the management expenses. These are
the expenses which are incurred by most of the organizations to hire people for the managerial
level. The budgeted value of the management is 182,000 and the actual value is also...


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