Question

Two things can cause a budget variance; quantity and cost. Why is a flexible budget essential for managers? What departments are responsible for quantity variances? Cost variances?   As a manager why do you think it is necessary to differentiate these causes?

Answer 1

Flexible budget is essential for the managers for the following reasons:

1. It can be used for the planning activity of the organization wherein they are able to forecast the performance in the financial arena at various levels of operation or the activity levels.
2. It helps the managers in monitoring the costs at the various levels of activity and thereby gives the organization scope for controlling the costs through various means.
3. Flexible Budget Variance results helps the managers in comprehending as to which part of the production process is favorable and which is not leading the managers to take decisions in order to bring about changes in those parts of the production process that are not favorable.
4. It helps in evaluating the performance of the managers as it helps in comparing the expectations at a given level of operating activity with the budget at that level.

Departments that are responsible for Quantity variances and Cost variances are as follows:

Quantity Variance: Production Department

Cost Variances: Purchasing Department

It is necessary to differentiate the causes of the variances as it throws light on the area that needs focus and improvement and that is where the action should be taken. It therefore as a manager would help in making futuristic, efficient and a detailed budgetary decision in the interest of the organisation. By understanding the causes for the variances it helps in putting in place the control mechanism for the purpose of controlling the costs and also assigning proper responsibility.