Question

As a practicing accountant or manager, discuss whether, at month end, accountants must explain every variance that arises due to actual results deviating from budget. Does the organization you work/worked for have guidelines on variance analysis? Please share your experience with respect to analyzing variances at month end.

BE DETAILED AND GIVE REAL-LIFE EXAMPLES

Answer 1

No, accountants usually don't explain every variance that arises due to the actual results deviating from budget. Every organization has what we call a "threshold amount" for identifying the variances to be explained or not.

The basic concept is that if variance in a particular item is "ABOVE" the threshold amount, then the accountant needs to explain the variance in detail. However if the variance is "BELOW" the threshold amount, the accountant need not explain the variance. No one can perfectly predict what the actual amounts are going to be and hence while comparing the actual figures with the budgeted figures, organizations have a range within which they accept the variance and which is within their expectations which is basically known as the "THRESHOLD".

Here's a practical example for explaining the same:

Refer the below extract of Income statement of Company XYZ. This is how the variance analysis of an organization looks like:

Threshold Amount for Variances: $50,000
Income Statement of Company XYZ
Particulars	Actual Amount ($)	Budgeted Amount ($)	Variance Amount	Variance %	Reasons for Variation
Revenue from Operations	3,50,000	2,00,000	1,50,000	75%	The company has earned an additional $150,000 revenue as compared to the budgeted amount since the company has entered into a special contract with the customer which has been entered into in the current year only.
Cost of Goods Sold	2,00,000	1,60,000	40,000	25%	Since the difference is below threshold amoount, we have not explained the reasons for variation.