United Consultancy is a company specialising in providing consultancy services to the F&B industry....

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United Consultancy is a company specialising in providing consultancy services to the F&B industry. United Consultancy prepared its operating statement for period 2 of the year ending 31 August 2012. This was as follows. Budget Actual Variance Chargeable consultancy hours 2,400 2,500 100 $ $ $ Administration staff salaries – fixed 15,000 15, XXXXXXXXXXConsultants' salaries – fixed 80,000 84,000 4,000 Casual wages – variable XXXXXXXXXXMotor and travel costs – fixed 4,400 4,400 - Telephone – fixed XXXXXXXXXXTelephone – variable 2,000 2, XXXXXXXXXXPrinting, postage & stationery – variable 2,640 2,590 50 Premises and equipment costs – fixed 3,200 3, XXXXXXXXXXTotal costs 110,400 116,480 6,080 Fees charged 180,000 200,000 20,000 Profit 69,600 83,520 13,920 While the directors are pleased that the actual profit exceeded their budget expectations they are interested to know how this has been achieved. After the budgets had been issued to them, the consultants expressed concern at the apparent simplicity of assuming that costs could be classified as being either fixed or varying in direct proportion to chargeable consultancy hours.
Requirements: Part a As the newly appointed Finance Director, prepare a report addressed to the board of directors of United Consultancy which: Page 11 of 18 i. Explains the present approach to budgeting adopted in United Consultancy and critically evaluate the advantages and disadvantages of involving consultants in the preparation of future budgets ii. Critically discusses the format of the operating statement for period 2 Part b Explain how a spreadsheet could be set up so that a flexed budget and variance calculations could be rapidly produced by inserting only the actual data, assuming that variable costs are thought to vary in line with chargeable consultancy hours. Part c Critically discuss the suitability of Zero-Based Budgeting for United Consultancy. Your discussion must clearly explain the advantages and disadvantages of Zero-Based Budgeting and supported by the real-world examples.

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Robert · Accepted Answer

Budget Variance Analysis                                                                                                             1
Budget Variance Analysis
Budget Variance Analysis                                                                                                             2
Contents 
Introduction: .................................................................................................................................... 3 
Part a: .............................................................................................................................................. 3 
Role of budgeting in strategic planning process: ........................................................................ 3 
Key purpose of Budgeting: ......................................................................................................... 4 
Planning ................................................................................................................................... 4 
Facilitating Communication and Coordination: ...................................................................... 5 
Allocating Resources: .............................................................................................................. 5 
Managing Financial and Operational Performance: ................................................................ 5 
Evaluating Performance and Providing Incentives: ................................................................ 5 
Budget prepared by the company: ............................................................................................... 5 
Incremental Budgeting ............................................................................................................ 5 
Part b: .............................................................................................................................................. 6 
Flexible budget: ........................................................................................................................... 6 
Variance Analysis: ...................................................................................................................... 8 
Variance Calculation: .................................................................................................................. 9 
Different Variances: .................................................................................................................. 11 
Situations for decrease in profits: .............................................................................................. 11 
Part c: ............................................................................................................................................ 12 
Zero based budgeting: ............................................................................................................... 12 
Behavioral implications of budgeting: .......................................................................................... 16 
Ethical issues in budgeting: .......................................................................................................... 16 
Conclusion .................................................................................................................................... 17 
References: .................................................................................................................................... 18
Budget Variance Analysis                                                                                                             3
Introduction: 
In today’s world planning is one of the most important thing which is needed by the organization 
to stay ahead. The organization focuses on setting up the goals which rests on the profitability 
and growth of the organization. So as to achieve the set goals and targets the organization needs 
to focus on strategic planning. The management focuses on executing and implementing 
strategic planning on a continuous basis so as to achieve competitive advantage and the set goals 
and targets of the organization.  
With the proper planning, implementation and execution of planning, the organization is able to 
achieve its set goals and targets and attaining a competitive edge from its competitors. The plans 
made by the organization are short term as well as long term.  
Part a: 
A budget is a detailed plan, expressed in quantitative terms, that specifies how an organization 
will acquire and use resources during a particular period of time. A budgeting system comprises 
the procedures used to develop a budget. Budgeting systems have five primary purposes: 
planning, facilitating communication and coordination, allocating resources, managing financial 
and operational performance, and evaluating performance and providing incentives. 
Role of budgeting in strategic planning process: 
Budgeting helps in analyzing the performance of the organization and individual departments. 
There is a strong interrelationship among the processes of policy setting through a strategic plan, 
budgeting the resources needed to deliver services that helps in accomplishing the goals of the 
plan, monitoring operations and reporting on performance, and assessing performance as it 
relates to the strategic plan. So through this we can say that the budgeting is one of the tools 
which help in evaluating and monitoring the performance of the organization. (Jerry, 2008) 
Budget Variance Analysis                                                                                                             4
Key purpose of Budgeting: 
The five main purposes of the capital budgeting are: planning, facilitating communication and 
coordination, allocating resources, managing financial and operational performance, and 
evaluating performance and providing incentives. 
Planning 
The main purpose of preparing a budget is to focus on quantifying the goals and plans of the 
organization for particular period. With the focus on the budgeting, the organizations are able to 
focus on planning for the future. 
Budget Variance Analysis                                                                                                             5
Facilitating Communication and Coordination: 
It is important for an organization to communicate the plans of each manager, so as to achieve 
the goals of the organization effectively. If the other managers are aware of the plans of the other 
department and other managers, then they will be able to coordinate and work effectively and 
efficiently to achieve the set target of the organization.  
Allocating Resources: 
As the organization has limited resources with it, budgeting helps in allocating the resources to 
different uses which helps in improving the efficiency of the organization.  
Managing Financial and Operational Performance: 
Budgets are considered to be the benchmark of the performance of the organization which forms 
the basis of comparing the actual performance of the organization. They are used to evaluate and 
monitor the financial and operating performance of the organization.  
Evaluating Performance and Providing Incentives: 
The managers focus on comparing the actual results with budgeted results which helps in 
evaluating the performance of the individuals, departments and the organization in whole. 
Through this the performance is evaluated and can be used as tool for analyzing and deciding the 
incentive for the individuals and departments who perform well. Many companies focus on 
awarding bonus to employees who meets or exceeds the benchmark. (Jerry, 2008) 
Budget prepared by the company: 
Incremental Budgeting 
A simplistic and often used approach to budgeting is called incremental budgeting. In essence, an 
incremental budget is derived from the current year's budget by adding amounts expected to be 
required by line items, such as salary and wage increases and increases in the cost of supplies 
and equipment to be purchased; decreases in line items that would result from shrinkage in the 
scale of operations forced by pressures such as spending limitations mandated by the electorate 
Budget Variance Analysis                                                                                                             6
or cuts in capital equipment purchases. Incremental budgeting focuses largely on controlling 
resource inputs and typically uses the line-item budget format in which the focus is on 
departmental expenditures for specified purposes or objects, such as personnel, supplies, 
equipment, and travel. (Ronald, 2006) 
Incremental budgeting is often contrasted with rational budgeting approaches, which stress the 
relation of inputs to outputs (amounts of work accomplished) and outcomes (impacts on goals 
and objectives). Rational budgeting approaches, as they have evolved, attempt to identify 
fundamental objectives of the governmental unit, estimate future-year costs and benefits, and 
systematically analyze alternative ways of meeting the governmental unit's objectives. (Ronald, 
2006) 
The company is currently adopting the participative performance based budgeting in which the 
company has set the budgets on the lower base of the fixed costs and sales and higher base of the 
variable cost. With this kind of budgeting one is able to feel motivated to perform more so as to 
achieve the target and the behavioral aspect of the employees are quite positive. (Ronald, 2006) 
With this kind of budget the company is not able to analyze its actual performance which it can 
easily handle in particular year but with this the company is able to provide strong benefits to the 
employees as well as motivate them to work more. (Cardif, 2006) 
Part b: 
Flexible budget: 
A flexible budget is a budget that changes with the change in the volume of activity. Since the 
flexible budget rearranges itself with activity levels, it is a commonly used tool for evaluating the 
performance of managers by doing comparative analysis. Whereas, the master budget is a 
summary, of company's future plans. It sets specific targets for the company as a whole. It covers 
sales, production, distribution and financing activities. It generally highlights cash budget, a 
budgeted income statement, and a budgeted balance sheet. (Ronald, 2006) 
A flexible budget (which assumes the activities to change according to the volume), is a part of 
the master budget (which assumes the activities to be static or fixed).

United Consultancy is a company specialising in providing consultancy services to the F&B industry. United Consultancy prepared its operating statement for period 2 of the year ending 31 August 2012....

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