Budgetary Control and Variance Analysis

Submitted to : Mr. Rajendra Sardesai By : Shilpa S. Kadam, Roll No. 43 MFM - I Batch I

Index

Budget and Budgetary Control 3 Forecasting 4 Variance Analysis 4 Company Profile of AJ Infotech Ltd. 4

Project Description 5

 Project Analysis 8 Steps for Budgetary Control 9

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:

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 the budgeted figures and actual figures and trying to find out the reason for the variances.

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 o

Forecasts till March 2008, and Variance analysis for the budget.

2. Annexure sheets
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a.

Annexure 1 Details of Revenue generation by AJ Infotech Ltd. Annexure 2 Details of level wise Bill rates - project wise payroll details.

b.

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.

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. Level Level A (> 6 years experience) Level B (4 - 6 years experience) Level C (2 - 4 years experience) Level D (< 2 years experience) 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.

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. 2.

The total headcount deployed and undeployed. Deployed Headcount (Resources currently working under projects) 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).

3.

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

5.

Level wise Bill rates on hourly basis.

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. Totals as per project type.

7.

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 actions1.

Review the total no. of projects as per project type. Increase the no. of deployable are not resources as the the undeployed heads. resources contributing to

revenue generation process but are increasing the other 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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