Question

What are some possible causes for budget variances? What can managers do to minimize budget variances? How can managers mitigate the effects of these variances?

Answer 1

Budget variances are the difference between budgeted data and actual figures. There are many reasons for occurrence of difference between actual and budgeted performances. Change in the factors like labor rate, overhead rates between the period when the budget was formulated and the actual implementation is a reason for variance. Another reason for variance is failure to plan correctly on the part of the management. Budget is based on past data and future predictions and often these predictions proved incorrect. Budget is prepared for the organization as a whole and failure of budget implementation from the part of one department may results in budget failure from other departments also. For example production budget is affected by purchase budget and failure of purchase department to implement its plans may affect budget of production department.

Budget variances arise due to the difference between present and future and future is always uncertain. So it is not possible for managers to eliminate variances completely. But by proper planning and coordination they can minimize budget variances and can formulate budget as accurate as possible. Use of advanced software, collection of data from reliable sources is some of the way to make accurate forecasting and thus results in minimum budget variance.

Effects of variances can be minimized by making an advanced provision for possible variances, by keeping flexibility in the budget for adjustment of possible changes and improving coordination among various departments.