Running head: BUDGETING, VARIANCE AND PERFORMANCE ANALYSIS

Budgeting, Variance Analysis, and Performance Evaluations

Students Name
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BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS

Budgeting, Variance Analysis, and Performance Evaluations

Memorandum
To:
From:
Date:
Subject: Budgeting, Variance Analysis, and Performance Evaluations
Introduction:
The interpretation of variance and standard cost analysis is a vital step for managers as
well as other heads of an organization because it helps them determine variances in their
operation performance. Besides, further studies on the variances assist managers to determine the
causes for taking correction action and variances action promptly (Ahsan & Gunawan, 2010). In
this view, this paper discusses the interpretation of the variance and flexible analysis of the
budget to get the reasons for the shift of variance and provide recommendations for the manager
to be able to offer corrective actions.
Flexible Budget Variances
It is evident that the actual revenues for the Houston store are noted to be lower than what
is expected in the budget. Therefore, this has resulted in high sale variance. Concerning the cost
of sales as well as the management expenses, it can be seen that the Houston store has suffered a
lot of expenses that the budget was expected to have (Ahsan & Gunawan, 2010). Besides, the
level of variance shows an adverse change from the sales variance leading to $20,000 changes,
while that of the management expenses resulted in the variance of $13,000. This is considered as
unfavorable variance encountered by the Houston store. This means that the Houston store
manager should come up with strategies to reduce the variance index to manageable levels.

BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS

Utility expenses and shop assistant have fewer values as compared to those in the budgeted
values; hence, this is indicated by favorable variances. A no variance was indicated in the rent
expenses because the same amount has been seen in the budgeted values and to actual values
(McGowan et al., 2010). The above shows and explains flexible budget variances in the actual
and flexible budget.
Static Budget Variance
A static budget is considered fixed in nature for the entire budget period, with no changes
to any actual activity. Therefore, even if actual sales changes from the expected values in the
static budget, the values of figure listed do not change (McGowan et al., 2010). The Houston
store uses the static budget as a primary reference point from which actual outcome are
compared; hence, the Houston store manager should consider having an elaborate and effective
analysis of the static budget. The level of variance resulting is called static budget variance. The
Houston store uses its static budget to evaluate the sale performance. Nevertheless, it is not
effective and efficient for determining the performance of cost centers (a unit within an
organization that costs are charged).
According to the analysis, the store manager was given a large static budget and was
expected to make the expenditure such as rent and utilities below the static budget. Despite the
fact that there was the large decline in the overall revenue increased the expense rate. For
example, T&P Fashion Shops created a static budget in which the revenues were forested to
$1,400,000 and the cost of goods sold to $740,000 (From a fixed of $210,000 and variable of
40%). The actual sale of the company was $790,000, which represents the unfavorable static
budget variance of $610,000.

BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS

The actual cost of sale is $790,000 which is considered as a favorable static budget
variance of $50,000. If Houston store has used a flexible budget instead, the cost of sale would
have changed to 20% of the sale from the actual values. The value would have dropped from
$1,400,000 to $210,000 if the actual sale had declined. It would have resulted in both the
budgeted cost of good and the actual revenue to remain the same so that there would be no cost
of sales variance. This clear indicates that static budget values to business organizations such as
T&P Fashion Shops, Houston store.
Benefits of Static and Flexible Budget to T&P Fashion Shops, Houston store
Flexible Budget
Adjustment for predictions: when a budget is prepared, assumptions on predetermined
production quantities and sales are considered. Due to unfavorable situations, these numbers
hardly remain as budgeted.
Control and Evaluation Mechanism: In case the production and sales volume allocated changes,
it is worth to consider that a flexible budget can offer T&P Fashion Shops, Houston store a
chance to evaluate its successes or failures hence amend its path (Grafton, Lillis & Widener,
2010).
Adapting change: Flexible budgets are denoted to help organizations adapt every financial
condition. In cases of inflation, such budgets support financial change as compared to a static
budget that do not support such alterations.
Static Budget
Ease of Use: To T&P Fashion Shops, Houston store it is easy to use and develop a static budget.
This is because the static budget does not support room for changes.

BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS

Tax Simplification: With Static budget it is easier to estimate revenues earned by T&P Fashion
Shops, Houston store (Libby & Lindsay, 2010).
Conclusion
From the analysis, it is evident that flexible budget is accommodative for T&P Fashion Shops,
Houston store. This because the targets and as well as competition in the industry is changing
thereby the budget should be able to accommodate such changes in the business environment.

BUDGETING, VARIANCE ANALYSIS, AND PERFORMANCE EVALUATIONS

References
Ahsan, K., & Gunawan, I. (2010). Analysis of cost and schedule performance of international
development projects. International Journal of Project Management, 28(1), 68-78.
Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial
accounting. Issues in Accounting Education, 25(4), 792-793.
Grafton, J., Lillis, A. M., & Widener, S. K. (2010). The role of performance measurement and
evaluation in building organizational capabilities and performance. Accounting,
Organizations and Society, 35(7), 689-706.
Libby, T., & Lindsay, R. M. (2010). Beyond budgeting or budgeting reconsidered? A survey of
North-American budgeting practice. Management Accounting Research, 21(1), 56-75.