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Chapter 10

Chapter 10 part II BU247.docx

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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 p
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