Question

Discuss in detail how budgeting relates to variance analysis.

Answer 1

Variance Analysis is a decriptive study of deviations of actual behavious versus forcasted behaviour in budgeting.

Budget Variance is a calculative measure taken by government or corporations periodically for analysing the differene between actual actual and budgeted figures. Budget Variances are affected by two type of factors such as Controllable factor which occurs within the organisations like labor cost, change in startegy etc. and second uncontrollablle factor which a organisation can't control or it haappens outside the reach of an organisation like natural disasters, change in tax policy etc.

Causes of Budget Variance

1.) By regulation or political or economical

These errors comes under uncontrollable factors, in this type budget variance increases because of some macro level activity like

a.) change in regulations by the government for ex. - ban on some chemical import which is used in production of any medicine.

b.) Political Disturbace

Political unstability always affects the economy of that country. for ex - because of political unstability corporations in Venezuala and Libia are badly affected that they are not able to conduct their operations.

c.) Economical

Suppose economy of any country is going thorugh hyper inflation which is causing hurdles in operating the organisation, that will increase the budget variance. For ex- When Zimbambwe's economy started suffering from inflation, all the organizations which were working over there faced trouble in forecasting and budgeting as no one was able to predict how much scenario's can go verse.

2.) Management Accuracy

Human errors can happen anytime and at anywhere, same applied with management decision and accuracy too. It comes under controllable factor, because of failure of management whole corporation suffers which results in budget variance

Types of Budget Vairaince

1.) Negative Variance

When a budget is prepared for a particular activity but the actual cost realisation came more than that, then it is called negative budget variance. For ex - if a budget is alloted of $100,000 for installation of new plant, but while setting up it cost $125,000 then because of the exceed $25000 this budget came under negative budget variance which is also called adverse budget variance

2.) Positive Variance

It is exact opposite of Negative Variance, when the actual cost realised is less than the budgeted cost then it is called positive budget variance. For ex. If $100,000 is alloted for installation of a plant, but after completion of work, the total cost occured was $85,000, here organisation has saved $15,000 so that's why it come under positive variance category.