Question

1) List sources of variances between budgeted and actual amounts

2) Describe the concept of zero-based budgeting.

Answer 1

Answer)

Variance between budgeted and actual amounts can be because of multiple reasons. Following could be the major sources of variance:

a) Favourable variance caused due to company making higher revenue than budgeted.

b) Variance can also be favorable if the budgeted expense is less than the actual expense and viceversa. Following operating expenses can bring about a variance:

Sales & Marketing Expenses= advertising cost, travel cost, mailing cost

Legal & Administrative Expenses = office stationery, depreciation of office assets, accounting expenses, legal fees involving a new lawsuit filed against the company

Compensation & Salary related Expenses = Sales commission, compensation and payroll expenses for non production staff, hiring costs, promotion and retention costs

Expenses part of cost of good sold = Freight in, freight out, cost and quantity of raw materials, direct labour involved in production, repair & replacement of production equipments, property tax

c) Variance can be unfavorable incase the actual revenue is less than budgeted revenue. This might happen when the company is unable to sell its products than actually estimated due to poor advertisments, increased competition in the market.