FINANCIAL ANALYSIS

 Financial Analysis



Financial Analysis

Q2: Variances

The following variances are based on actual quantities produced

Variance analysis

a

£

B

£

Variance (a - b)

£

Expected Labor

(20 x 2700)

54000

Actual Labor

(19.4 X 2700)

52380

1620 (F)

Expected Material

(40 x 2700)

108,000

Actual Material

(43.3 x 2700)

116,910

8910 (A)

Expected Production Overheads

31500

Actual Production Overheads

29940

1560 (F)

Admin Overhead

30,000

Admin Overhead

30,000

nil

Importance of Flexible Budget

Flexible or variable budgets are drawn up for different activities and can adapt various circumstances arising at any time. Flexible budget show the expected cost or budget in a particular time period. It helps the company to control costs as the company is aware about different costs level it may have to bear in different circumstances. It shows the revenues, costs and expenses adjusted to the size of manufacturing or commercial operations (William, 1999, pp. 22-28). It has wide application in the field of budgeting costs, manufacturing overhead, administrative and sales.

The flexible budget is a result of early consideration of the variations that may exist in sales revenue. This can lead to effectuation predetermining feasible changes in production volumes and therefore in costs. All expenses incurred due to: A) the passage of time, B) the production or productive activity, C) a combination of time and production or activity. The concept has following implications:

•Costs should be identified as to their fixed and variable components, as they relate to production or productive activity.

•Expenses must be reasonably related to the production or productive activity.

•Production is measured safely.

•The formulas of flexible budgets should be specified periods of time or for a specific and relevant scale of production.

•For the purposes of planning and control flexible budgets must be developed.

Flexible spending budgets are based primarily on the concept of the variability of expenditures, which focuses on the effect they have on them, over time and the production or productive activity.

In part that some expenses are largely fixed and partly variable costs fall into three general categories.

• Overhead.

• Variable expenses.

• Semi-variable costs.

Q3: Working Capital

Working capital is the economic resource for the initial and ongoing operation of the business that covers the gap between hand stream of income and expenses. Working capital is used only to finance the operation of a business and provide room to retrieve the sales portfolio. It determines the investment in short-term assets and its components are cash, marketable securities, accounts receivable and inventory. Working capital involves managing an organization in the best way so that components can be converted into cash ...