Consider the questions below and how your understanding of these will benefit your analysis, application and presentation of cost accounting information gathered in the place you work. How might...

Variance Analysis 1
Variance Analysis
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Variance Analysis 2

Budget Variance
Budget Variance can be defined as periodic measure implemented by government,
companies or individuals to quantify or measure variation between budgeted and actual figures
for a given accounting category. The main reasons behind occurrence of variances are inability
of forecasters to predict future with complete accuracy, making bad assumptions, improper
budgeting (politics to make an unusually easy or tough budget target) etc. Therefore, some
variances are always expected when budget is prepared.
Budget variances are result of two things- the things that can be controlled and things that
cannot be controlled. Controllable factors can be poor planning, increase in labor cost etc.
Uncontrollable factors are events arising from sources beyond control of company like natural
disaster. The planning for budget variance can be done by keeping some amount (revenue)
towards an emergency contingency account. It is also possible in few situations to get insurance
against some possible sources of budget variance like damages because of natural disasters,
increase in utility prices.
Types of Budget Variance
There are two types of budget variance given as follows:
1. Favorable Variance (better than expected): Favorable Variance implies
positive variances or gains. A favorable budget variance shows than actual results are
better than budgeted. It can be in the form of lower expenses, increased sales etc.
2. Unfavorable Variance (worse than expected): Unfavorable Variance
implies negative variances or losses or shortfalls. Unfavorable budget variance shows
that actual results are not same as expected. They are worse than the performance
budgeted by company. It can be in the form of higher expenses, low sales etc.
Variance Analysis 3

Variance Analysis and Budgeting
The variance analysis is an integral part of budgeting process. It is an instrument of
budgetary control by evaluating performance by means of variances between budgeted amount,
planned amount or standard amount and actual amount incurred or sold. It is a continuous
process wherein variances identified are worked upon or rectified (corrective measures are
undertaken). These variances are kept in mind while budgeting for next period, thus it is a
complete cycle which keeps on repeating itself.
Variances Analysis make standard costing such a valuable practice for management.
Management can quickly become aware of changes in budgeted costs by tracking the variances.
They can use this tool in measuring performance, estimating sales prices of final...