Variance Analysis
This is the difference between the predicted and actual figures.
It is vital that a business regularly reviews and revises its budgets. Any differences that exist between
the budgeted figures (i.e. sales, costs etc) and the actual results are known as variances.
This is carried out in relation to budgeting and cash flow.
Variances can either be favourable or adverse.
Favourable (positive) Variances:
Favourable (positive) variances occur where the actual amount of money flowing into the business is
more than the budgeted figure.
Where the actual amount of money flowing out of the business is less than the budgeted figure.
Represented as an "F" in a table.
Adverse (unfavourable) Variances:
Where the actual amount of money flowing into the business is less than the budgeted figure.
Where the actual amount of money flowing out is more than the budgeted figure.
Represented as an "A" in a table.
Reasons for a Favourable Variance:
An increase in the demand for the products of the business -> more money flowing into the business
in sales revenue.
A reduction in costs e.g. labour, raw materials, electric -> less money flowing out of the business.
Competitors ceasing to trade -> more trade for your business means increased income from sales
revenue.
Impact of a Favourable Variance:
Benefits Drawbacks
More money than predicted meaning higher motivation, Planning wasn’t accurate -> not as efficient as possible ->
staff involved will be motivated as they have done better the money left over could have been invested into other
than what they predicted. projects and made a profit. Instead it isn’t being used.
May mean more cash in the business -> could be used to Some managers may ask for more than they need to look
help with any cash flow problems in other parts of the more successful -> this means resources aren’t being
business. allocated efficiently.
Spare cash can be reinvested into the company for future If you have a favourable variance, the budget for next year
projects -> business can benefit in the long term. will be smaller for the department which can de-motivate
staff.
A favourable variance may be a result of a one of
saving/situation e.g. changing suppliers. It is difficult to
repeat this saving and managers feel under pressure to
repeat this again/cannot repeat this saving.
Reasons for an Adverse Variance:
Price Discounts on the products of the business -> means less money flowing in from sales revenue.
An economic recession -> means a down turn in sales and less money flowing into the business.
A rise in the costs for the business -> means more money flowing out.
Over ambitious sales targets have been set -> they may not be met and hence sales revenue may be
lower than predicted.
This is the difference between the predicted and actual figures.
It is vital that a business regularly reviews and revises its budgets. Any differences that exist between
the budgeted figures (i.e. sales, costs etc) and the actual results are known as variances.
This is carried out in relation to budgeting and cash flow.
Variances can either be favourable or adverse.
Favourable (positive) Variances:
Favourable (positive) variances occur where the actual amount of money flowing into the business is
more than the budgeted figure.
Where the actual amount of money flowing out of the business is less than the budgeted figure.
Represented as an "F" in a table.
Adverse (unfavourable) Variances:
Where the actual amount of money flowing into the business is less than the budgeted figure.
Where the actual amount of money flowing out is more than the budgeted figure.
Represented as an "A" in a table.
Reasons for a Favourable Variance:
An increase in the demand for the products of the business -> more money flowing into the business
in sales revenue.
A reduction in costs e.g. labour, raw materials, electric -> less money flowing out of the business.
Competitors ceasing to trade -> more trade for your business means increased income from sales
revenue.
Impact of a Favourable Variance:
Benefits Drawbacks
More money than predicted meaning higher motivation, Planning wasn’t accurate -> not as efficient as possible ->
staff involved will be motivated as they have done better the money left over could have been invested into other
than what they predicted. projects and made a profit. Instead it isn’t being used.
May mean more cash in the business -> could be used to Some managers may ask for more than they need to look
help with any cash flow problems in other parts of the more successful -> this means resources aren’t being
business. allocated efficiently.
Spare cash can be reinvested into the company for future If you have a favourable variance, the budget for next year
projects -> business can benefit in the long term. will be smaller for the department which can de-motivate
staff.
A favourable variance may be a result of a one of
saving/situation e.g. changing suppliers. It is difficult to
repeat this saving and managers feel under pressure to
repeat this again/cannot repeat this saving.
Reasons for an Adverse Variance:
Price Discounts on the products of the business -> means less money flowing in from sales revenue.
An economic recession -> means a down turn in sales and less money flowing into the business.
A rise in the costs for the business -> means more money flowing out.
Over ambitious sales targets have been set -> they may not be met and hence sales revenue may be
lower than predicted.
