Advantages and disadvantages of variance analysis
flexible budget because it adjusts for variances in volume of activity. The budget is prepared based on three levels of activity and this includes enrollment of 66, 100, and 120 students.
Total revenue per student is the same despite student enrollment and it is determined to be $6,063 per student
The total expense per student is $4,518 for 120 students, $5,283 for 100 students and $7,646 for 66 students.
All the expenses seem necessary since they are costs that are incurred in starting up and running a business. There are selling costs such as advertising, capital expenses such as computer equipment and operational costs such as salaries, field trips and maintenance and repairs.
The school is viable because it is generating income despite the level of activity. Income received increases with number of enrollment thus a high enrollment will provide high levels of profit. Also the total costs incurred in the startup can be repaid from net income.
Revenue = Total costs + profit
At breakeven point, profit is equal to zero thus; revenue = variable cost + fixed cost
The assumption in this breakeven analysis includes average per student revenue, average per student cost and monthly fixed rate.
$6,063Q = $694.5Q + $458,817
$5,368.5 Q = $458,817
Q = $458,817 / $5,368.5
Breakeven point = 86 students
6. Preparing a budget is beneficial because it allows the school to manage its funds and will enable the institution to identify where funds are required and it can efficiently allocate money. Since the school requires grants it is important to prepare the budget because potential funders will require the startup school to provide its budget statement. The budget is also beneficial in that it can assist in the identification problems that might occur thus permits rectification. The budget can be used as a tool to improve decision making since decisions are based on targets provided in the budget.
7. The budget can be used as a control function since it can be used to monitor plans implemented by the business thus corrective action can be taken. A budget can be termed as financial statement of plans and are linked to control system. After a budget is prepared the accounting system monitors the plan by providing information and then actual performance is compared against the budget then corrective can be implemented in case of any deviations.
1. Advantages and disadvantages of variance analysis
Variance analysis is an essential control tool because it draws attention to areas where actual performance is different from planned activities. Another advantage is that variance analysis can be helpful in identifying areas where assets are not efficiently utilized and areas where adjustments are necessary (Variance Analysis, n.d). Variance analysis therefore promotes efficiency in business management. Variance analysis can also be used to determine areas where cost overrun and identifies whether standard cost established are reasonable.
Variance analysis has a major drawback in that it takes a long time to examine the effect of the variance and therefore corrective actions are delayed. The monitoring tool results in large lag time and therefore application of control measures will be significantly delayed.
2. Another performance measure is sensitivity which determines variation in output can be attributed to variation in input. Sensitivity analysis determines the effect actual outcome if it differs from the planned activities (Investopedia, 2011).
Investopedia. (2011). Sensitivity Analysis. Retrieved On November 26, 2011 from Http://Www.Investopedia.Com/Terms/S/Sensitivityanalysis.Asp#Axzz1eiu1f5rw
Variance Analysis: Meaning, Advantages and Disadvantages. (N.D). Investment and Business Accountants. Retrieved On November 26, 2011 from Http://Www.Accountantnextdoor.Com/Variance-Analysis-Meaning-Advantages-And-Disadvantages/
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