Essay About Bayou’S Profi T Variance And Actual Income

Simplest Measure of Performance
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The simplest measure of performance is the variance, or difference, between actual income
and budgeted income. Bayou’s profi t variance, for example, is $75,500. That is the actual
profi t of $114,500 less the budgeted profi t of $190,000. Because actual income was less
than budgeted income, this is typically referred to as an unfavorable variance . For evaluation
purposes, we could stop here and say that Bayou’s performance did not meet expectations
because actual income was less than budgeted. However, this does not provide much
information about the causes of its actual performance. We want to look more closely at
the information available and try to use it to obtain more insight into operations.
See Exhibit 16.1 for Bayou Division’s actual income statement and the master budget
for August. The master budget represents the fi nancial plan for Bayou for the month and
the actual results refl ect the performance.
Before we analyze the variances in more detail, it is important to understand what the
labels “favorable” and “unfavorable” mean. Traditionally, they are used to indicate how
actual income differs from budgeted income. A favorable variance increases operating
profi ts, holding all other things constant. An unfavorable variance decreases operating
profi ts, holding all other things constant. Thus, when discussing revenue, income, or contribution
margin,