M4 - Analysis
Variances
There are many reasons why it is essential for a business to keep a budget and
monitor all the costs carefully. Variance analysis helps business to keep control
of their finances. ‘’Variance analysis is the quantitative investigation of the
difference between actual and planned behaviour. This analysis is used to
maintain control over a business.’’
Variance analysis helps businesses to
see the difference between the planned
budgeted amount and the actual
amount, for instance, if the sales are
less than they were planned to be, the
business will be able to identify that and see how much the difference is, which
they can analyse and found out what caused the sales to be different than the
planned, and this way the business can fix whatever issue that caused it. For
example, if Tesco budgeted to make £12,000 from their sales but made £8,000,
the difference would be £4,000, they can use this information to find out what
caused it and make sure it does not occur again and that they always meet
their budgeted amount or exceed.
There are two types of variance, favourable variance and adverse variance.
Favourable variance is a good thing for businesses, as it occurs when the sales
revenue is higher than budgeted or if the costs are lower than budgeted. This
can be either due to an increase in the price of the goods or an increase in the
demand for the products due to promotional activities. Adverse variance is the
exact opposite of that, occurs when the sales revenue is lower than planned or
if the costs are higher than planned.
For example, if Tesco plans their expenses for the stock and raw materials to
be £6,000 and at the end of the year the actual costs are £7,000, there is an
adverse variance of £1,000; this means that there is an issue causing the costs
to be more than expected. One of the reasons can be is that the business spent
more, such as they purchased more stock than they have planned to, either
due to the increase in demand, if more people were buying their products, the
business had to purchase more stock so they can continue making revenue.
Another reason for this could have been that the suppliers whom Tesco
purchased their stock from increased their prices, which lead to an increase in
Variances
There are many reasons why it is essential for a business to keep a budget and
monitor all the costs carefully. Variance analysis helps business to keep control
of their finances. ‘’Variance analysis is the quantitative investigation of the
difference between actual and planned behaviour. This analysis is used to
maintain control over a business.’’
Variance analysis helps businesses to
see the difference between the planned
budgeted amount and the actual
amount, for instance, if the sales are
less than they were planned to be, the
business will be able to identify that and see how much the difference is, which
they can analyse and found out what caused the sales to be different than the
planned, and this way the business can fix whatever issue that caused it. For
example, if Tesco budgeted to make £12,000 from their sales but made £8,000,
the difference would be £4,000, they can use this information to find out what
caused it and make sure it does not occur again and that they always meet
their budgeted amount or exceed.
There are two types of variance, favourable variance and adverse variance.
Favourable variance is a good thing for businesses, as it occurs when the sales
revenue is higher than budgeted or if the costs are lower than budgeted. This
can be either due to an increase in the price of the goods or an increase in the
demand for the products due to promotional activities. Adverse variance is the
exact opposite of that, occurs when the sales revenue is lower than planned or
if the costs are higher than planned.
For example, if Tesco plans their expenses for the stock and raw materials to
be £6,000 and at the end of the year the actual costs are £7,000, there is an
adverse variance of £1,000; this means that there is an issue causing the costs
to be more than expected. One of the reasons can be is that the business spent
more, such as they purchased more stock than they have planned to, either
due to the increase in demand, if more people were buying their products, the
business had to purchase more stock so they can continue making revenue.
Another reason for this could have been that the suppliers whom Tesco
purchased their stock from increased their prices, which lead to an increase in
