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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)|
|Cost of Sales||790,000||790,000||760,000|
- 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.
Computations (use Excel)
- Prepare a flexible budget and show variances for the year that passed. Indicate whether the flexible budget variances are favorable or unfavorable.
- 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?
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.
This module covers budgeting and variance analysis. Explore these topics further while keeping the above six objectives in mind. Click on the three arrows to explore each topic in more detail.
Check Your Understanding
Check your understanding to make sure that you have a good grasp of the background material. If you are not comfortable with the concepts, review some of the material again or go to the optional resource for more examples.
Key aspects of budgeting are planning and control. Budgets also serve as tools of communication.
Planning is crucial to an organization. It provides a framework for making decisions by establishing goals, objectives, and strategies. It is oriented toward the future and involves an awareness of how today’s decisions will affect tomorrow’s opportunities. Planning is essential for achieving both short- and long-run organizational goals, and successful managers are continuously planning.
Budgets are objective and are measurable. Results-oriented objectives are the foundation for controlling operations. Controls also involve the monitoring of the implementation of plans through performance reviews. They are used to compare actual results with objectives.
A flexible budget can be adjusted for changes in assumptions or variations in the level of operations. A budget can be adjusted for changes in assumptions or variations in the level of operations. Variance analysis based on flexible budgets are therefore more meaningful than those based on a static budget.
For further detail refer to Dr. Walther’s accounting text and videos.
|Walther, L. (2017). Chapter 21: Budgeting—Planning for Success.|