Analysing Budgets Flashcards
What is variance?
The difference between actual figures and budgeted figures.
What does variance mean?
The business is performing either worse or better than expected
What does a favourable variance lead to?
Increased profit
If revenue is more than expected than the budget says what type of variance is this?
Favourable
What does adverse variance lead to?
A difference that reduces profits
If the business sells fewer items than the income budget predicts, what type of variance is this?
Adverse Variance
What is it called when variances add up?
Cumulative variance
Why do businesses need to know about variances?
They can find out why they have occurred
Why is it extremely important to spot Adverse variances?
To figure out which budget holder is most responsible and need to take action to solve.
Why is it also important to spot favourable variances?
Budget targets may be too easy so need to be more difficult
What are 3 external factors that cause variance?
Competitor behaviour
Changes in the economy
Cost of raw materials
What are 4 internal factors that can cause variance?
Improving efficiency
Changing the selling price
Overestimating the amount of money it can save
Underestimating the cost of making a change to its organisation
What does variance analysis mean?
Spotting variances and figuring out why they have happened
Why can large variances demotivate?
Staff may not see the need to work hard if they have a large favourable variance
What do businesses need to beware of when reacting to variances?
Changing budget too much
Demotivation
