Budgeting Basics and Beyond

8.12. Nonmanufacturing Activities

When nonmanufacturing activities repeat and result in a homogeneous product, standards may be used. The manner of estimating and employing standards can be similar to that applicable with a manufactured product. For instance, standards may be used for office personnel involved in processing sales orders and a standard unit expense for processing a sales order may be derived. The variance between the actual cost of processing a sales order with the standard cost can be appraised by sales managers and corrective steps taken. The number of payroll checks prepared should be a reliable measure of the activity of the payroll department. The number of invoices or vouchers prepared apply to billing and accounts payable. In these two cases, a standard cost per unit could be based on the variable expenses involved.

Variance analysis is used in non -production-oriented companies such as service businesses. Because we are not dealing with a product, a measure of volume other than units is necessary, for example, time spent. The measure of revenue is fee income.

The cost variances are still the same as in a manufacturing concern, namely budgeted costs versus actual costs. We also can derive the gross margin or contribution margin variance as the difference between that budgeted and that actually obtained. The profitability measures are expressed as a percent of sales rather than as dollars per unit. The relationship between costs and sales often is highlighted. ...