Podcast
Questions and Answers
Explain how variance analysis can assist in making informed business decisions, particularly concerning supplier relationships or advertising strategies?
Explain how variance analysis can assist in making informed business decisions, particularly concerning supplier relationships or advertising strategies?
Variance analysis identifies the causes of financial discrepancies, such as higher supplier prices, prompting a search for new suppliers, or the effectiveness of an advertising campaign, leading to its continuation or modification.
How do favourable and adverse variances differ, and what actions might a manager take in response to each type of variance?
How do favourable and adverse variances differ, and what actions might a manager take in response to each type of variance?
Favourable variances occur when actual figures are better than budgeted, prompting managers to understand and replicate successful strategies. Adverse variances, where actual figures are worse, require corrective actions to avoid future occurrences.
Describe how inaccurate sales data can affect a company's budgets and overall financial planning?
Describe how inaccurate sales data can affect a company's budgets and overall financial planning?
Inaccurate sales data leads to inexact budgets across the firm. Since sales data underlies many budgets, inaccuracies can distort financial planning and resource allocation.
What is profit variance and how is it influenced by other variances?
What is profit variance and how is it influenced by other variances?
How can focusing too much on short-term budget targets negatively impact long-term business performance? Give an example.
How can focusing too much on short-term budget targets negatively impact long-term business performance? Give an example.
Explain how a departmental manager might manipulate a budget, and what could be the ultimate consequences for the business?
Explain how a departmental manager might manipulate a budget, and what could be the ultimate consequences for the business?
Describe how the setting of budgets may lead to conflicts between different departments or staff within a company.
Describe how the setting of budgets may lead to conflicts between different departments or staff within a company.
Why might a business avoid consulting workers during the budgeting process, and what problems can arise from this approach?
Why might a business avoid consulting workers during the budgeting process, and what problems can arise from this approach?
How can budgets sometimes restrict business activities, especially concerning decisions about replacing equipment or vehicles?
How can budgets sometimes restrict business activities, especially concerning decisions about replacing equipment or vehicles?
What does the text mean by 'short-termism' in the context of budgeting, and how can it negatively impact customer service?
What does the text mean by 'short-termism' in the context of budgeting, and how can it negatively impact customer service?
Flashcards
Budget Variance
Budget Variance
The difference between the budgeted figure and the actual figure for a business.
Favorable Variance
Favorable Variance
Occurs when actual figures are better than budgeted figures (e.g., higher revenue, lower costs).
Adverse Variance
Adverse Variance
Occurs when actual figures are worse than budgeted figures (e.g., lower revenue, higher costs).
Variance Analysis
Variance Analysis
Signup and view all the flashcards
Profit Variance
Profit Variance
Signup and view all the flashcards
Using Variances for Decision Making
Using Variances for Decision Making
Signup and view all the flashcards
Budgets are not actuals
Budgets are not actuals
Signup and view all the flashcards
Short-termism
Short-termism
Signup and view all the flashcards
Study Notes
- A variance in budgeting refers to the difference between the budgeted figure and the actual figure.
- Variance calculations are typically done at the end of the budget period.
- Variances can either be favorable (F) or adverse (A).
- Favorable variances are when the actual figures are better than the budgeted ones.
- An example of a favorable variance: budgeted sales revenue for a month was £25,000, but the actual revenue was £29,000, resulting in a £4,000 favorable variance (£29,000 - £25,000).
- Another example: planned costs were £20,000, but the actual costs were £18,000, resulting in a £2,000 favorable variance.
- Adverse variances occur when the actual figures are worse than the budgeted figures.
- Managers examine variances to identify the reasons for their occurrence, which can help improve future business performance.
Types of Variance
- Variances can be calculated for a wide range of financial outcomes.
- Budgets are usually set for expenditure (costs) and income (sales revenue).
- Variance analysis helps to monitor business costs effectively.
- Variances can be related to wages, materials, overheads, sales revenue, or volumes.
- Examples include sales variance and labor hours variance.
- Profit variance is a crucial variance, influenced by all other variances.
- Any change in a variance will affect profit, as all variances relate to either costs or revenue.
- The number of possible variances is equal to the number of factors influencing business costs and revenue.
Using Variances for Decision Making
- The analysis of variances is the final stage in budgetary control.
- Identifying the reasons for variances is crucial.
- If variances are adverse, action is needed to prevent them in the future.
- If variances are favorable, businesses can understand why they occurred and implement strategies for continued improvement.
- Information about the causes of variances helps in making decisions about running the business.
- An adverse cost variance might lead a business to find new suppliers if the cause was higher prices.
- A favorable sales revenue variance might prompt a business to use similar advertising campaigns in the future.
- Variance analysis helps business decision-makers by providing information about financial outcomes and their causes.
Difficulties of Budgeting
- Businesses may encounter problems when setting budgets and using them as tools for financial management.
Setting Budgets
- Problems can arise because budget figures are not actual figures.
- Budget figures are based on historical data, forecasts, or human judgment.
- A business might construct budgets by adding a percentage to historical data without systematic analysis.
- Sales data is the most important data in the preparation of nearly all budgets, and inaccurate sales data can lead to inexact budgets.
- Setting budgets may lead to conflict between departments or staff such as competition for limited funds.
Motivation
- Workers may be left out of the planning process, making it difficult to use the budget to motivate them.
- Unrealistic budgets can also fail to motivate staff.
Manipulation
- Budgets can be open to manipulation by managers.
Rigidity
- Budgets can sometimes restrict business activities.
Short-termism
- Some managers might focus too much on the current budget: actions might be taken that damage the future performance of the business just to meet current budget targets.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Understand budgeting variance analysis with examples. Learn about favorable and adverse variances, their calculation, and importance in improving business performance. Explore how managers use variance analysis to identify areas for improvement.
