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Chapter 10

BU247 Chapter Notes - Chapter 10: Sunset Provision, Sensitivity Analysis

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Greg Clark

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BU247 Chapter 10 Using Budgeting for Planning and Consideration Week 10
What-if Analysis
Sensitivity Analysis
-Sensitivity analysis is the process of selectively varying a plan’s or a budget’s key estimates or the
purpose of identifying over what range a decision option is preferred
Comparing Actual and Planned Results
-To understand results, organizations use variance analysis to compare planned or budgeted results in
the master budget with actual results
Variance Analysis
-Variance analysis has many forms and can result in complex measures, but, its basis is very simple an
actual cost or actual revenue amount is compared with a target cost or target revenue amount to
identify the difference, which is called a variance
-Budgeted, or planed, costs can come from three sources:
1. Standards established by industrial engineers
2. Previous period’s performance
3. A performance level achieved by a competitor
Planned amount = Standard price/unit x Budgeted quantity
Actual amount = Actual price/unit x Actual quantity
-Variance analysis explains the difference between planned costs and actual costs by evaluating
differences between standard prices and actual prices and budgeted quantities and actual quantities
Basic Variance Analysis
-Variance analysis helps managers understand the source of the differences the variances between
actual costs and budgeted costs
-If managers learn that specific actions they took on some jobs helped lower the actual costs of these
jobs, they can pursue further cost savings by repeating those actions on similar jobs in the future
-If they can identify the factors causing actual costs to be higher than expected, managers may be able
to take the necessary actions to prevent those factors from recurring in the future
For an example of this refer to ‘Canning Cellular Services’ on p. 418 – 428
For another example refer to ‘Danny’s Bagel Barn’ on p. 428 – 430
The Role of Budgeting in Service and Not-for-Profit Organizations
-In the service sector, the focus is on balancing demand and the organization’s ability to provide
services, which is determined by the level and mix of skills in the organization
-Planning in the service sector must consider the time needed to put skilled new people in place as sales
-In NFP organizations, the focus of budgeting has been to balance revenues raised by taxes or donations
with spending demands
-In government agencies, planned cash outflows, or spending plans, are called appropriations
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