![]() Remember, it is the cause and significance of a variance that matters – not whether it is favourable or adverse. However, these may have occurred because sales are significantly higher than budget (favourable budget). Here is a point that students often find hard to understand – or believe!Īn adverse variance might result from something that is good that has happened in the business.įor example, a budget statement might show higher production costs than budget (adverse variance). Instead concentrate on items showing a large adverse variance. Items of income or spending that show no or small variances require no action. “ Management by exception” is the name given to the process of focusing on activities that require attention and ignoring those that appear to be running smoothlyīudget control and analysis of variances facilitates management by exception since it highlights areas of business performance which are not in line with expectations. Whether it is a temporary problem or the result of a long term trend.How big was the variance - absolute size (in money terms) and relative size (in percentage terms)?.Whether it is positive or negative – adverse variances (negative) should be of more concern.This means there is a favorable flexible budget variance related to revenue of 1,600 (calculated as 800 units x 2 per. In the most recent month, 800 units are sold and the actual price per unit sold is 102. The significance of a variance will depend on factors such as: For example, a flexible budget model is designed where the price per unit is expected to be 100. Should variances be a matter of concern to management? After all, a budget is just an estimate of what is going to happen rather than reality. Revenue/profits were lower than expected. ![]() Revenue/profits were higher than expectedīy contrast, an adverse variance might arise because:.Costs were lower than expected in the budget, or.Adverse/unfavourable ( worse than expected).Positive/favourable (better than expected) or.A variance arises when there is a difference between actual and budget figures.Ī key word to understand when you are looking at budgets is “variance”Ī variance arises when there is a difference between actual and budget figures
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