3.5.2.1 Analysing Financial Performance: How to analyse Budgets.

Question 1

What is a variance?

Answer 1

The difference between budgeted and actual figures.

Question 2

What is variance analysis?

Answer 2

The process by which the outcomes of budgets are examined and then compared with budgeted figures. The variance is then found.

Question 3

Define an adverse variance.

Answer 3

When costs are higher than expected or revenue is lower than expected.

Question 4

What is a favourable variance?

Answer 4

When costs are lower than expected or revenue is higher than expected.

Question 5

When is a favourable variance shown?

Answer 5

Actual revenue is greater than budgeted revenue.

Actual costs are below the budgeted ones.

Question 6

When is an adverse variance shown?

Answer 6

Actual revenue is less than budgeted.

Actual costs are above budgeted.

Question 7

What may an adverse variance indicate?

Answer 7

Inefficiency, areas where the business needs improvement and possible external changes, causing difficulty to meet targets.

Question 8

What does a favourable variance indicate?

Answer 8

Efficiency, areas where the business has operated well, eternal influences making it easier to meet targets.