Post on 22-Dec-2015
Aims & Objectives
Aim:• Understand variance analysisObjectives:• Define variance analysis• Explain the causes of variance• Analyse managerial reactions to variance analysis• Evaluate the usefulness of variance analysis
Starter
• Define a budget
• Give 2 advantages to the business of using budgets
• Give 2 disadvantages to the business of using budgets.
+ / - of Budgeting
-Control finances.-Measure performance.-Improve staff performance/motivation.
- Cause conflicts between departments.-Over ambitious targets may be set resulting in demotivation.-Budgets will only be motivating if the whole dept has created them.
Bob’s Beer Budget
• Bob• University Student• Budgeted his first week at
university• After his first month he
realised that his actual amount spent was different
Bob’s Beer BudgetItem Budgeted Cost £ Actual Cost £ Difference +/- £
Food 50 15
Alcohol 20 112
Fancy Dress 20 72
Cleaning Products 5 0
Train Ticket Home 30 30
Total 125 229
Bob’s Beer BudgetItem Budgeted Cost £ Actual Cost £ Difference +/- £
Food 50 15 + 35
Alcohol 20 112 - 92
Fancy Dress 20 72 - 52
Cleaning Products 5 0 + 5
Train Ticket Home 30 30 0
Total 125 229 -104
Variance Analysis
• Variance: the difference between a budgeted figure and the actual figure achieved.
• Variance Analysis: is the comparison by an organisation of its actual performance with its expected budgeted performance over a period of time.
Favourable Variances
Favourable Variances: • A better result than expected• Budgeted figure is less (costs) or more
(revenue) than expected.• Leads to higher than expected profits
Item Budget £ Actual £ Variance £
Sales Revenue 50,000 60,000 10,000 favourable
Fixed Costs 15,000 12,000 3,000 favourable
Evaluation:Favourable variances are not always good, as cheaper costs, may mean that quality of goods suffers as a result!
Adverse Variances
Adverse Variances:• A worse than expected result• Costs higher or revenue lower than expected• Should lead to lower than expected profits
Item Budget £ Actual £ Variance £
Sales Revenue 50,000 40,000 10,000 adverse
Fixed Costs 15,000 17,000 2,000 adverse
Worksheet Budget Actual Variance
Sales Revenue £650,000 £645,000
Fixed Costs £46,000 £44,000
Labour Costs £230,000 £256,000
Material Costs £98,000 £94,000
Profit £276,000
What causes variances?
• In groups discuss what the main causes of favourable and adverse variances may be?
Favourable Variance Causes
1• Bad publicity for competitors products leads to increased sales
2• Lower interest rates lead to increased sales
3• Consumers have more disposable income
4• Demand for good/service increases
Adverse Variance Causes
1• Competitors offer better price deals, lowering sales.
2• Labour productivity falls leading to higher costs per unit
3• Oil prices increase
4• Rent/rates/lighting increases
Decision Making
• Variances affect decision making by managers.
Task: Identify the potential drawbacks of the following management reactions to adverse sales variances.
Adverse Sales Variance Reactions
• Could this start a price war with rivals?
• Might perceived quality be damaged?
Lower prices to increase sales
• Affect promotional budget• Rivals might spend even more!• Will impact just be short term?
Increase promotional
spending
Adverse Sales Variance Reactions
• How long will this take?• Will new products be
successful?Update
product range
• Market research will cost more• Will new products need to be
developed?Look for new
markets
Adverse Cost Variance Reactions
Task: Identify the potential drawbacks of the following management reactions to adverse cost variances.
Adverse Cost Variance Reactions
• Will quality suffer?• Will new suppliers be
reliable?
Obtain cheaper supplies
• Impact on motivation • Could lead to industrial
action - strikesCut wages
Adverse Cost Variance Reactions
• May need new machinery, staff training, leading to higher costs in SR.
Increase Labour Productivity to
reduce labour cost per unit
• May need a change in working practices, short term benefits may be limited.
Reduce Waste Levels