Kiran Company (MCS-2004) Numerical
Budget versus Actual comparison for div Z of Kiran company is as follows:
(a)Carry out and overall performance analysis to decide areas needing investigation.
From the given data, we see that there is a certain amount of variance between the budgeted operating profit and actual operating profit. In order to analyze the variances, we need to understand the key causal factors that affect profit, namely, revenues and cost structure. The profit budget has embedded in it certain expectations about the state of total industry, company’s market share, selling prices and cost structure. Results from variance computation are actionable if changes in actual results are analyzed against each of this expectation.
Revenue variances, that is a negative Rs 60 lakhs, could be a result of selling price variance, mixed variance and/or volume variance. A combination of above three factors must have been unfavorable that is either the volume of sales must have been below the budgeted volumes ( this must be particularly true since actual variable expenses are less than budgeted) and/or the selling price must have been below expectation and/or the proportion of products sold with a higher contribution must have been less than budgeted.One more factor could have been the overall industry volume. However, this factor is beyond the managements control and largely dependent on the state of economy.
Variable expenses are directly proportional to volumes and hence as is evident are less than budgeted.Sales promotional expenses also show a negative variance which could be a cause of lower sales volumes.A cause of concern is that despite lower sales, the net working capital is more than budgeted which indicates capital block in higher inventory.Another issue is that the fixed assets are lower than the budget by Rs 12 lakhs which may indicate slower capacity expansion then expected or distressed sale of assets to tide over cash flow.
(b)What are the remedial measures if any would you suggest based on analysis?
The budgeted estimates may be too optimistic and far from reality, one needs to ensure that estimates the as realistic as possible. Given the estimates are correct, in that case depending upon the above analysis, the management needs to take corrective action areas needing improvement, sales volume could be improved by better marketing, quality standards and promotional efforts, product mix could be improved by selling more of higher contribution products. Better sales will ensure a higher inventory turnover. Better credit management to recover receivables, will ensure improve cash flow situation since less capital will be tied up in working capital.