Question

Should all variances be researched, favorable and unfavorable? Why or why not? Are there certain variances that you feel are particularly important?

Answer 1

Actually management prepares budgets for all activities like production ,sales,materials etc at budget price. And Also estimates the standard price using a scientific formula / from last years values. And When Actual costs incurred,these are highly required for management to understand how much are they deviated from the budgeted performance.If unfavorable they are under performing and it helps them to find the reasons. If favorable variance occurs they are performing good and they asses the reasons contributed for the same and will do take them into consideration in the coming years of business. The deviation between Actual and Standard are considered to understand the Business changes that resulted in the differences and to take them into consideration for next year budgeting. Thus identification of these variances is a must and is a lot of help to the management to take further decisions on budgeting.