22842810 Budgetary Control and Variance Analysis

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Budgetary Control and

Variance Analysis

Submitted to : Mr. Rajendra Sardesai

By : Shilpa S. Kadam, Roll No. 43

MFM - I Batch I

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Index

Budget and Budgetary Control

3

Forecasting

4

Variance Analysis

4

Company Profile of AJ Infotech Ltd.

4

Project Description

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Project Analysis

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Steps for Budgetary Control

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Budget is the plan set before the period in quantitative and/

in value (monetary) terms for the activity to be conducted

during that period. For satisfactory control, budgets require

regular review and modification to reflect rapidly changing

conditions in the business environment, e.g a business may

operate CONTINUOUS BUDGETING on quarterly basis.

Budgetary Control may be defined as the setting up of

budgets and comparing the actual with budgeted figures

either for control or to reset the budgets.

Steps for Budgetary Control:

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a) Setting up of plans and budgets for each functional area

like sales, production, purchase etc.

b)Measuring and recording actual performance of each

functional area.

c) Comparing the actual performance with the planned

performance and measuring the deviations or variations.

d) Investigating into the causes of the deviations and

identifying the problem areas.

e) Taking corrective action and ensuring that such

deviations do not arise in future.

Forecasting A forecast is a suggestive representation of

future likely events or possibilities under the prevailing

conditions. It is for short term and highly probabilistic.

Variance A variance represents the difference between

plan and achievements expressed in monetary terms. A

budget variance is the difference between a budget figure

and an actual figure for a budget period. Variance Analysis is

a process of ascertaining the difference between thebudgeted figures and actual figures and trying to find out the

reason for the variances.

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Where the difference results in a better profit figure than

planned, it is called a favourable variance. If however, the

variance has the effect of reducing the actual profit as

compared to the planned profit, it is called as an adverse or

unfavourable variance.

Company Profile of AJ Infotech Ltd.

Company AJ Infotech Ltd. is into developing software

projects for overseas clients. Depending upon the complexity

of the projects, the projects are divided into three types

large, medium and small. The project budget depends upon

these project types and the volume of Revenue generated (in

dollars) is to be accounted.

Project description:

1. The Profit and Loss Statement for the period April 2007

to Mar 2008 for the company AJ Infotech Ltd. is given

with details for

o Budgeted figures for FY 2007 2008.

o Actuals till September 2007.

o Forecasts till March 2008, and

o Variance analysis for the budget.

2. Annexure sheets

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a. Annexure 1 Details of Revenue generation by AJ

Infotech Ltd.

b. Annexure 2 Details of level wise Bill rates - project

wise payroll details.

c. Annexure 3 Details of Travel and Entertainment

Expenses.

d. Annexure 4 Details of project wise Sales and

Marketing Cost and Total targeted projects.

Sales and Marketing costs are accounted under

o Payroll Cost

o Travel and Entertainment Cost and

o General and Admin Cost.

Payroll cost It is the bifurcation of project wise costs

incurred.

The Travel and Entertainment costs These are the

expenses incurred by the projects on the employees.

The General and Admin Costs These include the Rent

charges, Operational expenses, Depreciation and other

general expenses of the entire staff i.e. payroll of other staff,

namely Sales and Marketing, HR, & Administration along with

the payroll of project engineers.

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Project wise details of Headcount The headcount varies

as per the requirement of resources in a particular type of

project. Also the level of the resources changes depending

upon the experience of the resource. Also the payroll varies

as per the software expertise and experience in years.

However, the pay rate per hour is dependent only on the

level of the resource and not on the project type.

LevelLevel A (> 6 years

experience)Level B (4 - 6 yearsexperience)Level C (2 - 4 yearsexperience)Level D (< 2 yearsexperience)

Data taken into account:

The set budget is for the expected growth and percentage of

sales Module for the year 2007-2008. The Budgeted figures

are profit-centre based. i.e., the target figures are to be

achieved by AJ Infotech Ltd. AJ Infotech has to achieve the

budgeted figure by the end of year. For the Budgetary

Control, the revenue and inflation has to be taken into

account.

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The Actual figures upto the month of September 2007 are

provided under all heads. The forecast is done on the basis of

the actuals and is calculated as:

[Actual cost no. of months passed]*remaining

months*110%.

This is so because the company expects a growth of 10%

higher than what it has achieved in the past six months, i.e.

upto September 2007. The forecasting has been done taking

into account the Historical trends, Bill Rates and the cost

rates. The projected forecast has considered the Fixed and

variable costs and the growth of overall volume of the

projects.

Terms used:

1. The total headcount deployed and undeployed.2. Deployed Headcount (Resources currently working under

projects)

3. Un-deployed Headcount (Resources not undertaken by

any particular project at the time of putting the actuals

but working for the company and to be deployed for

future projects).4. Headcount bifurcation as per large, medium or small

projects.

5. Level wise Bill rates on hourly basis.

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6. Total no. of work hours in the year will be 1720. The total

no. of hours are worked out as below.

Calculation:

((52 weeks X 5 days a week) 20 public holidays 20

paid leaves 5 sick leaves) X 8 hours a day.

7. Totals as per project type.

Along with the 17500 Project staff, there are 201 Sales and

Marketing, HR and Administration personnel working with AJ

Infotech Ltd. Out of 17,500 resources, 14,000 resources at

the time of Forecast were working on the various, large,

medium and small projects.

Project Analysis: (Variance Analysis)

Why the variance is adverse?

After forecasting it is observed that the projected figures for

Costs, Sales and Marketing along with General and Admin

expenses are showing a profit margin above the budgeted

figures for these heads.

However, the profit margin of projected Revenue is very low

compared to the budgeted Revenue. Hence though the costs

are below the budgeted levels, the profit is going to be eaten

up by the gap in Revenues. Hence the overall variance is

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adverse. The management will have to take immediate

necessary steps to recover the budgeted benchmark.

Steps for Budgetary control:

To achieve the necessary target revenue, the company has

to concentrate on increasing the revenue generation for the

remaining six months.

For this the management can take up one or more of these

actions-

1. Review the total no. of projects as per project type.

Increase the no. of deployable resources as the

undeployed resources are not contributing to the

revenue generation process but are increasing the other

heads.

2. Exercise a control on the Travel & Entertainment costs.

This will automatically not only reduce the overheads

but work towards achieving the targeted revenue.

3. AJ Infotech will have to take up more projects and also

utilize the undeployed staff.

The working on the forecast and the variance calculations is

attached herewith.

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Documents

22842810 Budgetary Control and Variance Analysis