imagine that for the second quarter in a row, profits are down at Waterfall divi
ID: 2443078 • Letter: I
Question
imagine that for the second quarter in a row, profits are down at Waterfall division. Division Management budgeted $250,000 in profits for the 2nd quarter but actual results were only $197,000 in profits. The division management insists that the budgets were developed realistically but admits sales were down. The division has been under pressure to improve profitability. Corporate Management has asked you to identify the primary cause of the shortfall – revenue or costs?Address the following as you develop your answer to Corporate.
How will you approach your analysis of the situation?
What variance analysis and / or trends would be helpful to evaluate?
What are three possible situations that could be the cause for the shortfall in profits?
What actions would you recommend for these three possible situations?
What recommendations would you make to management to improve the budget process for next year?
Explanation / Answer
How will you approach your analysis of the situation?
This is very common in any business any have budget is not the final result it is just a guess by looking in historical basis it is recommended to have flex budget with variance analysis.
What variance analysis and / or trends would be helpful to evaluate?
A variance is the difference between an actual result and an expected result. The process by which the total difference between standard and actual results is analyzed is known as variance analysis. When actual results are better than the expected results, we have a favorable variance (F). If, on the other hand, actual results are worse than expected results, we have an adverse (A).
In detail we can do variance analysis by taking into consideration Revenue variance, direct material variance, and direct labor variance.Sales mix variance, direct material quantity variance, and direct labor yield variance etc.
What are three possible situations that could be the cause for the shortfall in profits?
A business profit shortfall can be related to a complete economic downturn, an industry-wide downturn or changes in an individual company's business operations. A company can use several strategies to stop the shortfall and get back on solid ground
What actions would you recommend for these three possible situations?
I recommend few actions to be followed to improve the business. They are as follows.
· Cut Expenses
· Increase Financing
· Weed Out Products and Services
· Open Up New Markets
· Merge With Another Company
What recommendations would you make to management to improve the budget process for next year?
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