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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4 • • • • Project Description 5 2 .Index • Budget and Budgetary Control 3 Forecasting 4 Variance Analysis 4 Company Profile of AJ Infotech Ltd.

Steps for Budgetary Control: 3 . For satisfactory control.• 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. 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. e.g a business may operate CONTINUOUS BUDGETING on quarterly basis. budgets require regular review and modification to reflect rapidly changing conditions in the business environment.

Forecasting – A forecast is “a suggestive representation of future likely events or possibilities under the prevailing conditions”. 4 . It is for short term and highly probabilistic. purchase etc. c) Comparing the actual performance with the planned performance and measuring the deviations or variations. e) Taking corrective action and ensuring that such deviations do not arise in future. 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. b) Measuring and recording actual performance of each functional area.a) Setting up of plans and budgets for each functional area like sales. d) Investigating into the causes of the deviations and identifying the problem areas. Variance – A variance represents the difference between plan and achievements expressed in monetary terms. production.

Company – AJ Infotech Ltd.Where the difference results in a better profit figure than planned. is into developing software projects for overseas clients. The project budget depends upon these project types and the volume of Revenue generated (in dollars) is to be accounted. If however. is given with details for o Budgeted figures for FY 2007 – 2008. medium and small. the projects are divided into three types – large. and Variance analysis for the budget. it is called a favourable variance. Depending upon the complexity of the projects. The Profit and Loss Statement for the period April 2007 to Mar 2008 for the company AJ Infotech Ltd. the variance has the effect of reducing the actual profit as compared to the planned profit. Project description: 1. it is called as an adverse or unfavourable variance. Annexure sheets 5 . 2. o Actuals till September 2007. o o Forecasts till March 2008. Company Profile of AJ Infotech Ltd.

e. The General and Admin Costs – These include the Rent charges.project wise payroll details. d. Sales and Marketing costs are accounted under – o Payroll Cost o Travel and Entertainment Cost and o General and Admin Cost. b. Payroll cost – It is the bifurcation of project wise costs incurred. Operational expenses. 6 . c.a. The Travel and Entertainment costs – These are the expenses incurred by the projects on the employees. Annexure 2 – Details of level wise Bill rates . namely Sales and Marketing. Annexure 3 – Details of Travel and Entertainment Expenses. Depreciation and other general expenses of the entire staff i. Annexure 4 – Details of project wise Sales and Marketing Cost and Total targeted projects. & Administration along with the payroll of project engineers. HR. Annexure 1 – Details of Revenue generation by AJ Infotech Ltd. payroll of other staff.

However.Project wise details of Headcount – The headcount varies as per the requirement of resources in a particular type of project.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.e. the pay rate per hour is dependent only on the level of the resource and not on the project type.6 years experience) Level C (2 . The Budgeted figures are profit-centre based. the target figures are to be achieved by AJ Infotech Ltd. the revenue and inflation has to be taken into account. For the Budgetary Control.. Also the payroll varies as per the software expertise and experience in years. i. AJ Infotech has to achieve the budgeted figure by the end of year. Level Level A (> 6 years experience) Level B (4 . 7 . Also the level of the resources changes depending upon the experience of the resource.

i. The forecast is done on the basis of the actuals and is calculated as: [Actual cost ÷ no. This is so because the company expects a growth of 10% higher than what it has achieved in the past six months. 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). 4. Headcount bifurcation as per large. medium or small projects. of months passed]*remaining months*110%. 8 . 2. The total headcount – deployed and undeployed. 5. Level wise Bill rates on hourly basis. The forecasting has been done taking into account the Historical trends.The Actual figures upto the month of September 2007 are provided under all heads. The projected forecast has considered the Fixed and variable costs and the growth of overall volume of the projects. Terms used: 1. 3. Bill Rates and the cost rates.e. upto September 2007.

7. of work hours in the year will be 1720.000 resources at the time of Forecast were working on the various. large. Totals as per project type. Hence though the costs are below the budgeted levels. of hours are worked out as below. Along with the 17500 Project staff. Out of 17.6. 14. Project Analysis: (Variance Analysis) Why the variance is adverse? After forecasting it is observed that the projected figures for Costs. Total no. Hence the overall variance is 9 . However. Calculation: ((52 weeks X 5 days a week) – 20 public holidays – 20 paid leaves – 5 sick leaves) X 8 hours a day. there are 201 Sales and Marketing. the profit is going to be eaten up by the gap in Revenues.500 resources. the profit margin of projected Revenue is very low compared to the budgeted Revenue. medium and small projects. HR and Administration personnel working with AJ Infotech Ltd. The total no. Sales and Marketing along with General and Admin expenses are showing a profit margin above the budgeted figures for these heads.

AJ Infotech will have to take up more projects and also utilize the undeployed staff. 10 . The working on the forecast and the variance calculations is attached herewith. For this the management can take up one or more of these actions1. Review the total no. of projects as per project type. of deployable are not resources as the the undeployed heads. The management will have to take immediate necessary steps to recover the budgeted benchmark. Exercise a control on the Travel & Entertainment costs. This will automatically not only reduce the overheads but work towards achieving the targeted revenue. 3. Increase the no. resources contributing to revenue generation process but are increasing the other 2. Steps for Budgetary control: To achieve the necessary target revenue.adverse. the company has to concentrate on increasing the revenue generation for the remaining six months.

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