Variances

Question 1

What is variance analysis?

Answer 1

Calculating and investigating the differences between actual results and the budget.

Question 2

What are favourable variances?

Answer 2

When actual figures are better than budgeted figure.
eg costs are lower than expected, or revenue/profits are higher than expected.

Question 3

What are adverse variances?

Answer 3

When actual figures are worse than budgeted figure.
eg costs are higher than expected, or revenue/profits are lower than expected.

Question 4

What are some possible causes of favourable variances?

Answer 4

• higher demand than expected.
• higher selling prices than expected.
• cautious sales and cost assumptions.
• competitor weakness leading to higher sales.
• better than expected productivity or efficiency.

Question 5

What are some possible causes of adverse variances?

Answer 5

• unexpected events lead to unbudgeted costs.
• overspends by budget holders.
• overoptimistic sales forecast.
• market conditions means selling prices are lower than budget.

Question 6

Do variances matter?

Answer 6

It depends on…
- if the variance was foreseen.
- size.
- cause.
- if it is a temporary problem or the result of a long term trend.

Question 7

What is management by exception?

Answer 7

focusing on activities that require attention, not those that are running smoothly.