To,

President,

Coopie Awards

Reg: Analysis of Budget Variances

Respected Madam,

As it is evident from budget analysis that actual sales of $1,548,000 is lower than static budget sales of $1,575,000 and sales department has not performed according to expectations.

You are also correct with your contention that actual costs are lower than budgeted sales and cost variances are favorable but it does not lead to result that production department has worked efficiently and controlled costs.

To evaluate performance of production department it is not advisable to compare actual with static budget but actual should be compared to flexible budget because flexible budget tell us what should be sales and costs at actual volume of unit sales.

If we compare flexible budget to actual and analyze flexible budget variances.

Sales revenue variance is favorable $43,000 indicates that sales department has worked efficiently and although has not achieved budgeted volume of sales units but units sold are sold at higher price than budgeted price.

Flexible budget variances regarding materials labor are unfavorable indicating that production department has not worked efficiently and failed to control costs. Material variance may be unfavorable due to two reasons that either price for material purchased are paid higher than budgeted price or excess material is used than budgeted quantity of materials. Same with unfavorable variance of labor, either higher rates are paid than budgeted rates or there is wastage of time.

Selling and Administrative cost variance is favorable indicating that selling and administrative department has worked efficiently and controlled costs.

Thanks