a) Distinguish between budgetary planning and budgetary control

Budgetary planning facilitates a business developing plans for the future. Planning provides a focus for a business. It provides objectives or goals which the business should see as the stepping stones to achieving its strategy. A business is unlikely to be successful unless its managers have a clear plan regarding its future direction. Plans require financial resources (money) and generally the financial resources of a business are limited. Thus it is essential to evaluate the financial implications of pursuing each course of action open to the business. In so doing, a business can select the course that hopefully will achieve its strategic objectives. Budget planning involves the preparation of a master budget sets out the plans for the business for the next accounting period based on various assumptions of sales and sales growth, inflation (in particular labour inflation), interest rates, taxation and capital expenditure. However budgetary planning is only one part in the overall budgetary process. Budgetary control is also essential because actual performance needs to be monitored and compared to the budgeted targets set to evaluate the performance of the business. Actual performance will always differ from the fixed budget as the business environment is quite dynamic and thus events and conditions may not turn out as anticipated in the budget. It is important that actual events in a budget period are monitored against the budget plan so that timely action can be taken to remedy or improve the situation. Budgetary control is concerned with the manner in which budgets are used as a tool of management.

The approach here is to follow the following steps

• Prepare the fixed budget in a marginal costing profit statement format. The fixed budgeted is based on the formula budgeted price x budgeted volume. It is important to exclude VAT from the selling price by multiplying €9 x 100/112.5
• Prepare the flexible budget. This is where we ascertain what the budget would look like based on actual volume. The formula for this budget is budgeted price x actual volume. The difference between the fixed budget and flexible budget is due to difference between budgeted volume of activity and actual.
• Prepare the actual results in a marginal costing profit statement format. Again sales must exclude VAT. This is done by multiplying the sales figure of €562,500 x 100/112.5.
• In the question there are two categories of variances. Volume variances based on comparing the fixed and flexible budget and price/cost variances based on comparing the flexible budget and actual results. One summary variance is calculated for the volume variances namely the sales margin volume variance. This is because there is only one possible reason for this variance. However the price/cost variances are detailed for each category or type.

Statement - fixed and flexible budgets with actual results and variances

The following is a summary of the variances calculated

Comment on the results

Overall profit has fallen by €3250 or 2% (3250/163250). This is ultimately a small overall variance however each variance must be looked at individually.

Sales price variance: This is a negative variance of €20,000. Ultimately the business did not achieve its budget target average spend of €8. The actual average spend was €7.7 (500,000/65,000). The effect of this variance is that actual profit was 12.5% (20,000/163,250) less than budget due to the business not achieving its target average spend.. Possible reasons for this could include an unrealistic budget target, increased competition and reducing prices as a strategy to boost volume sales.

Food cost variance: This is a negative variance of €12,000 resulting in actual food cost being 5.76% (220,000/208,000 –1) greater than budget at the same level of activity. The effect of this variance is that actual net profit is 7.35% (12,000/163,250) less than budget due to this single cost variance. This is a significant variance and management should ascertain its causes. These could include an unrealistic budget target, inflation in the food sector not taken into account in preparing the budget, uncompetitive practices in tendering suppliers and lack of good materials /food control with increased levels of waste.

Sales margin volume variance: This positive variance is created by the business selling more covers than anticipated in the budget. Actual volume of activity increased by 8.33% (5000/60,000). Thus actual profit is €24,000 or 14.7% (24,000/163250) greater than budget due to the greater level of sales activity. This could be related to the lower average spend achieved or possibly the budget target was too easily achievable.

The fixed cost variance: This is a positive variance of €4,750. Actual profit is 2.9% (4750/163250) greater than budget due to this variance. To analyse this variance one would need a break-down of what constitutes fixed costs and the individual variances that make up the overall fixed cost variance. This is not available form the question.