Analysing budgets. Flashcards
What is a variance?
The difference between budgeted figs and actual ones. It will show that a business is not meeting its budget and is either doing better or worse than expected.
Whats a favourable variance, where does it occur?
When a business is doing better than expected resulting in having more capital than predicted. If a business has made more or spent less than expected the budget variance will be favourable (assuming the other factor is the same or better than predicted too.)
What’s an adverse variance?
When a firm is performing worse than expected resulting in using more of the budget than predicted. Selling less or spending more than expected will lead to this.
Formula for budget variance?
Variance = actual figure - budgeted figure.
Do variances add up? What is it referred to when they are?
Yes, if a business simultaneously earns more(+3000) and spends less (+2000 e.g) than predicted they are added - 3000 + 2000 = £5000 F.
- Known as cumulative variance.
Show a running total for 2 months with the budget variances included.
Even if a variance seems favourable, is this always good? What must a business do when they get a variance.
Not always, it means a business has not been able to budget sufficiently.
It is imperative a business spots an adverse variance immediately and sorts it out ASAP. Whilst not as important, a business should still investigate favourable variances; they could mean the business are not setting difficult enough targets and understand why performances are better than expected, this can be implemented wholistically.
What external factors can cause variances?
Changing demand due to competitor behaivour or changing trends.
Economic changes increase labour costs or costs of raw materials e.g. builders will have to charge more for a project if their materials are more expensive.
What internal factors can cause variances?
Improved efficiency.
Overestimation how much can be saved by streamlining production methods (A).
Underestimate the costs of making a change to the business.
Changing selling price affecting demand.
Internal variances are a big concern and indicate communication is insufficient.
What is variance analysis.
Having identified a variance, variance analysis is simply figuring out why they happened and taking the steps to fix them.
Is the size of a variance always an issue?
Not really for small variances, no business will ever predict exactly and it can actually be motivating to try and reach the budget level when it is adverse, and also motivating when small F as can motivate staff to continue the good work.
However its a big issue when it is large as it demotivates staff who think it’s futile to try and balance an unrealistic variance.
What three factors would a business consider when changing either a budget to fit the business or the business to meet the budget?
- Beware of altering the budget too much.
- Changing a budget removes the element of certainty, which makes budgets useful.
- Can make them less motivating by altering them; when staff see managers changing budgets instead of how they operate, they will not see any point in trying to improve to stop variances.
What decisions do businesses make based on adverse variances?
- Change the marketing mix - could cut prices to increase sales if product is price elastic. Could try to update product to appeal more, or find a new market, or change the promotional strategy.
- Streamlining production to increase productivity.
- Cut costs by asking for a better deal from suppliers.
- Do more market research to make more accurate budgets.
What decisions do businesses make based on favourable variances?
- More ambitious targets.
- If a department is getting favourable variances, try and emulate their methods all over and set higher budgets based on this.
- Could show better sales than predicted, so increase production and take on more staff to facilitate this.
