Dancin' Donuts, established in January 2019, is a thriving new business specializing in low-carb don
Dancin' Donuts, established in January 2019, is a thriving new business specializing in low-carb donuts. The 2019 keto diet fad led to increased sales, and the chief financial officer (CFO) prepared a robust budget for 2020. In early March 2020, the small business had record-breaking sales but abruptly needed to shut its doors because of the global pandemic. The CFO conducted the following analysis for the month of March:
Dancin' Donuts March 2020Budget
Actuals
$ Var
%
Total Revenue
200,000
196,947
-3,053
-2%
Total Cost of Goods Sold
100,000
98,000
-2,000
-2%
GROSS PROFIT
100,000
98,947
-1,053
-1%
Total Expense
75,000
72,000
-3,000
-4%
Total Interest Income
200
100
-100
-50%
Total Other Expense
1,000
1,000
0
0%
-800
-900
-100
13%
Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA)
24,200
26,047
1,847
8%
Total Interest Expense
6,400
6,385
-15
0%
Total Depreciation & Amortization
10,000
10,000
0
0%
Earnings Before Taxes (EBT)
7,800
9,662
1,862
24%
Total Income Taxes (30%)
2,340
2,899
559
24%
Net Income
5,460
6,764
1,304
24%
What does an AVB stand for?
What is the total revenue for March 2020 when compared to the budget?
What is the variance from the budget in the net income for the month?
What is the income tax percentage for the month?
.1. AVB is actual versus budget variance analysis.
.2. Actual total revenue for March is $ 196,947 compared to the budget revenue of $ 200,000.
Difference or negative unfavorable variance from the budget is $ -3,053 or -2% indicating
that the company missed on its projected revenue.
.3. The company has a positive variance or favorable budget variance of $ 1,304 in the net income
meaning the company earned more than the budget or projected net income for the month.
.4. Income tax percentage for the month is 30%.
Step-by-step explanation
A budget is the financial plan of what the company wants to achieve in a particular period. The budget is
compared to the actual results to determine the difference or variance. The variance may be higher or
lower than the budget, favorable and unfavorable for the company.
An example is the unfavorable variance in revenue, where the actual result is lower than the budget.
The variance is unfavorable because the company has less revenue than what was anticipated.
Earnings before taxes has a favorable variance of $ 1862 or 24 % from the budget, indicating higher earnings for the company than what was in the budget report.
Another example is the favorable variance in net income where the actual result is higher than the budget. Anytime there is increase in net income that is always favorable for the company.
Actual total expense for the period is $ 72,000. Comparing the amount with the budget of $75,000, there is a favorable variance of - 4% or - $ 3,000. The variance is considered favorable because the company spent less than what was in the budget for total expense. The decrease in total expense of the company may have helped in the positive variance in net income despite the unfavorable variance in revenue.
Income tax percentage for the month (30%) is a fixed rate set by the government.
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