Peyton Budget and Analyzing - Assignment Example

Finance and Accounting of Budgeting is a necessary process in an establishment. It helps manage the resourcesand reduce wastage. In most times, budget estimates differ from actual results of operation. The differences may be favorable or unfavorable. Variance analysis seeks to establish the variances that exist between budget estimates and actual results (Bragg, 2010). The variance analysis of Peyton Approved discusses the variances in the Peyton budgets and possible causes to these variances. The sales budget for Peyton Approved shows that the company forecasts sales to be $1,080,000 for the quarter ending September 2015. To cover the sales and the required ending inventory, the company needs to produce 60,000 units. That would require 27,380 units of raw material at a cost of $212,195. The total labor requirement is 30,000 hours at a cost of $480,000. While the budget estimate for direct material for the period is 36,320 units, the actual amount of direct labor is 31,000 units. The budgeted price per unit of direct material is $7.75. It is also the actual price. Given the difference is only on the number of units of direct material, the direct material price variance is zero. As for the direct material efficiency variance, the company records a favorable efficiency variance of $41,230. That gives a favorable total material variance of $41,230. There was no material price variance as the budget price and the actual price were the same. As for the favorable efficiency variance, there may have been several causes. As the actual production shows, there was less direct material usage than the budget estimates. That may have been a result of efficiency in utilizing material in the production process. The procurement process may also have contributed to the favorable efficiency variance. Where there is purchase of high quality material, there would probably be no wastage and the production may use up less material than the estimates (Nobles, Mattison and Matsumura, 2014). Skilled labor also improves productivity and reduces wastages. That would also reduce the amount of material requirements in the production process. Another cause for the favorable material usage variance could be the use of advanced manufacturing equipment and processes that reduce wastage and maximize resource utilization. On the production budget, the direct labor requirement estimate is 30,000hours at the rate of $16 per labor hour. However, the actual results are 33,000 labor hours at the rate of $15 per labor hour. That gives a favorable direct labor price variance of $33,000 while the labor efficiency variance is unfavorable at $48,000. The total labor variance is $15,000 adverse. The favorable direct labor rice variance may be an indication of cost efficient utilization of direct labor (Nobles, Mattison and Matsumura, 2014). It may result from, as is the case of Peyton Approved, lower labor rates than the budget estimates. Lower labor rates could be a result of increase in supply of labor in the market. It could also be due to the quality of labor employed. Unskilled and semi-skilled labor tends to cost less than skilled labor. Apart from the low labor rates, a favorable labor price variance could also result from setting high labor costs in the budget. That is attributable to inaccurate planning and fails to give a proper picture of the forecasts (Bragg, 2010). The unfavorable labor efficiency variance may suggest that direct labor was less productive comparative to expectations. The production process took up more labor hours than the budget estimates. That could have been a result of several causes. The use of low skill labor could result in reduced productivity. The firm may have hired low skilled labor at lower rates to minimize costs. However, that increased the labor hours and hence the labor costs in the process. That may be evident in the favorable direct labor variance. There could also be a dip in morale and motivation among the workers. Where the staff lacks motivation and morale, they tend to be less productive. That would lead to wastage of time leading to a higher amount of hours for the production process than the budget estimates (Nobles, Mattison and Matsumura, 2014). Stoppages and interruptions in the production process could also lead to efficiency variances as the stoppages create idle time. The company has to compensate the workers for the idle time and the extra time they have to use to finish the production. Another cause for the efficiency variance could be an understatement of labor requirements for production. Where there is an understatement of the labor hours required for the production process, there would be an unfavorable efficiency variance. The actual results would be higher than the budget estimates. The determination of the labor and material variances are helpful in making comparisons between the budget and the actual results of operation. A firm can gauge its performance through the results. However, the variances would be useless if the causes of the variances remain unknown. It therefore becomes necessary to examine several elements of the production process to determine the causes of the variances. Some of the areas to analyze would be the procurement of direct material, budgeting process and the hiring process (Nobles, Mattison and Matsumura, 2014). To determine the causes of direct material efficiency variance for Peyton Approved, analysis of the budgeting process and the procurement of direct material is necessary. It is necessary to examine the budgeting process to ascertain that the budgeted amounts are accurate. Inflated or underestimated amounts of direct raw material would cause variances, both adverse and favorable. As for the procurement of materials, there may be loopholes that would cause variances. The purchase of cheap material may aim at reducing cost of material. However, the material may be of low quality. That could lead to wastage in the production process thus causing an adverse material efficiency variance. The examination of the procurement process is therefore necessary to ascertain the quality of the material purchased. That would give a hint as to why there was need for more material than the budget estimates. The labor variances may be attributable to the budgeting process or the hiring process. It is therefore necessary to analyze the two processes in order to determine the actual cause of the variances. The budgeting process, if flawed, may lead to inaccurate estimates in both the labor requirements and the costs. That would lead to either favorable or adverse variances. An examination of the budgeting process would therefore reveal any overstatements or understatement in the estimates. It would therefore help reveal the real cause of any of the variances. The hiring process affects the quality and cost of labor employed. At times, a company may go for cheap labor to reduce its production costs. The cost of labor may also be cheap due to existing rates in the market. However, an examination of the hiring process would help reveal the causes of labor variances. The cheap labor that a firm may opt for may be unskilled. Due to the lack of skills, the workforce may end up wasting both material and time. That would cause adverse variances for the company. However, the use of skilled labor may reduce wastage of both time and material. Such a workforce, however, may come at a higher cost than the budgeted amount (Nobles, Mattison and Matsumura, 2014). An analysis of the type of labor employed would therefore help shed light as to the real cause of variances. Each type of labor has a different effect on the variances. In budgeting, several variances may occur between the budget and actual results of operations. Several causes occasion these variances. Although one may calculate the variances, it would be difficult to tell exactly what causes the variances. It therefore becomes necessary to analyze the items likely to cause the variances. Such an analysis makes it possible to pinpoint the causes of each variance. Knowing the cause of each variance helps a firm come up with ways to minimize the variances. It also helps in planning and budgeting as it would make the budgeting process more accurate. References Nobles, T.L., Mattison, B.L., and Matsumura, E.M. (2014). Horngren’s Financial and Managerial Accounting (4th Ed.). Upper Saddle River, NJ: Pearson Education, Inc. Bragg, S.M., (2010). The New CFO Financial Leadership Manual. New Jersey: Wiley Read More