Question

I NEED 2 PARAGRAPHS RESPOND TO THIS TYPING SO I CAN COPY IT

Managers create budgets from anticipated financial conditions and market expectations for future periods. They calculate revenues and expenses for the specific period being budgeted. Once that period has come, managers compare the actual expenses to the budget numbers and evaluate the department’s performance (Adams, 2017). This is usually done through a variance analysis, which uses the difference between actual performance and budgeted performance to evaluate the performance of individuals and business units (Lanen, 2018, P. 621). It helps to identify and determine the possible causes of the difference (Lanen, 2018, P. 621). It also helps maintain control over a unit’s expenses by monitoring planned versus actual costs (Adams, 2017). A few common variances used in variance analysis are profit, purchase price, labor rate, variable overhead spending, fixed overhead spending, and selling price. Effective variance analysis allows management to understand why fluctuations occur in its business, and what it can do to change the situation. A variance analysis should be performed on variances that are of most concern for the company, especially if it can be rectified. For example, a company’s budget for sales was $12,000, but the actual sales were $9,000, the variance analysis would yield a difference of $3,000. A complete analysis could reveal that the variance was caused by a lost account. The customer purchased $2,600 per month from the company. The account was lost, due to the company’s inconsistent delivers.

            The downside of using variance analysis is that managers usually only receive them once a month, so they rely on other measurements (Adams, 2017). The reasons for the variances are not always located in the accounting records, managers must sort through information to determine the causes of the difference. Lastly, the variance may not produce any useful information.

Answer 1

In a company, Budgets are Prepared and then compared with the Actual data, resulting in Variances.

Now variances are of two types ie

1. Cost Variances
2. Sales Varinaces

COST VARIANCES: Any variance relates with the cost of product.

Eg. Mateial cost variance= Standard cost - Actual Cost

Now material cost variance consists of Material Quantity Variance and Material Rate Variance

Material Rate variance= (Standard Quantity - Actual Quantity)*Actual Price

Material Quantity Variance=(Standard Rate - Actual Rate)*Standard quantity

Material Rate variance + Material Quantity Variance = Material Cost Variance

Material cost Variance tells us how much excess or saving are there in material costs with respect to standard budget.

Material rate variances tells us how much difference is there because of increase pr decrease in the price of a raw material or component.

Material quantity variance tells us how much difference is caused due to excessive use of raw material or how much money is saved due to effecient use of raw material.

Hence at any point of time, wherever any variance shall be reflected, cost manager can make effective decision to rectify the situation.

Example let say budgeted rate of component was $2 however it is acquired for $3. Reports tell due to increase in taxes, market price has been increased to $2.50, therefore purchase manager can be held liable for balance $0.50 ($3-$2.50)

SALES VARIANCES: Any variances related with sale of product

Example as mentioned in question itself.

LIMITATION

Now it is very important for cost manager to get these (Variances) information on timely basis to take corrective action before its too late. Generally, the variances are calculated on monthly, quarterly, semi annually or annually basis, but by then, damages or loss had already been incurred. However any further loss could be saved.

SOLUTION

There are some cost softwares which are linkes with the accounting software of entities. Budgets quantity and budgeted rates are embedded into these softwares and whenever any unusual or different entry shall be passed, it will send an immediate alert to the Cost manager who may make corrective action on timely basis.

Example: confinuing above example:

Standard rate of $2 is embedded into such software by cost manager. Now purchase manager procures the component for $3 and passes the journal entry in accounting software. Now due to mismatch, system shall automatically sent an alert to cost manager and he will take immediate corrective actions.

Hence with the use of such softwares, variances could be used to its full potential and losses could be reduced.