Journ~~lofAccounring Education. Vol. 6. pp. 309-323. 1988 0748.5751/88 $3.00+.00 Printed in the USA. All rights reserved. Copyright 0 1988 Pergamon Press plc Teaching and Educational Note BUDGETING AND PROFIT VARIANCE ANALYSIS USING A FINANCIAL PLANNING LANGUAGE Terrance R. Skantz UNIVERSITY OF HOUSTON, CLEAR LAKE Abstract: This note describes an alternative to typical budgeting and variance analysis exer- cises. As a term project, students use financial planning software to prepare budgets and then use “what-if” techniques to facilitate profit variance analysis. The method enhances under- standing of the relationships among budgets, eliminates formula-driven variance analysis, and elucidates the relationship between budgeting and variance analysis. A typical budgeting assignment involves preparing proforma statements. However, the analysis of sales and production cost variances is generally divorced from proforma statements and consists of either working through formulas or using columnar presentations which show the impact of each variance on the income statement. (For an example of the latter approach, see Horngren and Foster, 1987, Ch. 6). While the columnar approach is probably superior to pure formula-driven analyses, both methods fail to trace variances through the financial statements. In the columnar approach, for example, production cost variances must be included in the income statement as plug figures if there are inventory changes. The class project described in this note emphasizes the close link between proforma statements and variance analysis. As a term project in a graduate class, students use a financial planning language to construct a set of budg- ets and then use the budget model to conduct profit variance analysis. The “what-if” capabilities of the financial planning language facilitate profit variance analysis. The student must trace the impact of each budget devia- tion through the financial statements. This approach reduces their reliance on formulas and eliminates the dichotomy which may seem to exist between production and sales variances. FINANCIAL PLANNING LANGUAGE VERSUS SPREADSHEET SOFTWARE A VAX minicomputer and IFPS (Interactive Financial Planning System) are used to prepare the model and conduct the subsequent profit variance analysis. (IFPS is also available in a menu-driven, microcomputer version.) IFPS is a financial planning language, which relies on English-like state- ments rather than the abbreviated cell references used by spreadsheet soft- 309