Question

How variance in budgets can be used as tools of controls in an organization. Explain this using illustrations.

Answer 1

Variance in budgets means the difference between the budgets, planned or standard cost and the actual ones. These can be calculates for both revenue and cost.

Variance in budgets can be used as a tools of control in an organisation as it helps in following :-

- It shows the difference whether adverse or favourable and explains the difference.

- It helps management to decide whether to cut its expense or introduce incentive schemes.

- It also helps to understand the present cost and then on the basis of present cost it helps in determines future costs.

For example - Material Price Variances - Change in budget price and actual price . Purchase manager would be held responsible for the occurrence of this budget variance.

Budgeted price = 50/ unit

Actual price = 70/unit

Actual quantity = 100

Material price variance = (Budgeted price - Actual price) x actual quantity

= (50 - 70) x 100 = 2000 adverse

It means actual expense on raw material is more than the budgeted and hence, corrective actions should be needed accordingly.