Adverse Or Unfavourable Variances

This organisation uses budgets to control the costs for a limit of period by equating what was spent during that time to the master budget. This benefits B.A as they would be observing all their expenses and returns which prevent them from surpassing their budgets. This business uses budgets because it is a valuable tool when evaluating B.A performance and value of their budget. Budgeting is beneficial to B.A as it helps them with planning orientation such as it helps to create a budget plan where it can use it to improve the business performance and the financial position. Also having budgets it provides several benefits for B.A such as managing money successfully where the business can identify revenue and outflow easily and make changes
For example, from the table food is favourable as the budget by the Finance Team was £100 but the actual figure for food was £50 which leads to the variance which was £100 and this is favourable as B.A are saving money and the cost is lower than expected figure which is favourable. On the other hand, Adverse or unfavourable variances in B.A are when the actual figures are higher than the budget. One problem in the budget for B.A is fuel shown above in the table, as the produced budget for this was £850 but the actual figure was £1000, leading to the variance of £150. This was adverse for B.A as the actual cost was higher than expected and is unfavourable to the business. This is one the mistakes in budgeting as this has lead the organisation cost increasing than their predicted costs and exceeded their budget.
Another problem with this budget is the income, this is because, B.A predicted they were supposed to receive £1500 fare income per passenger but the actual figures was £1450 fare income per passenger where it is adverse as it is less than the predicted budget and is making loss per passenger. Furthermore, the last problem in the budget is the budgeted passengers per journey which was predicted 20 but in the actual figures it was 18. This shows it is adverse as the actual figure is less than the produced budget where this business would be making
This suggests that this business would make profit at 15 journeys and this is calculated using the break-even formula which is;
BEP = Fixed cost / Unit contribution (selling price per unit – variable price per unit), when substituting with the actual figures it would be;
6000 (fixed cost) / 400 (1500 selling price per unit – 1100 variable price per unit) = 15
Break-even point can help British Airways when it comes to budget as it is a technique to evaluate the least output they need to produce and sell in order to subsist in the market against competition. This business needs to carry out break-even point by comparing their sales revenue with their total costs over a range of output and calculate the break-even point. Break-even point can help this business with the budget as it can calculate the quantity of goods it would need to make an acceptable profit, calculate the prices for their products or services which they need to charge and the calculate how the changes in their price can impact on their profits and on the break-even points. Break-even can help this organisation by determine the sales quantity or the number of their products/services which must be sold in order to generate sufficient revenue to pay its expenses and also to they would be aware of how many units must be sold to reach the break-even point in order to prevent incurring losses