This paper presents factors that a manager should consider when writing a variance report to his/her vice president. Variance is the difference between the actual incomes and expenditure less the budgeted cost at a particular given time (Vance 2013). Before understanding variance, it is appropriate to understand budgets first. Budgeting is the financial planning strategy where estimated costs of income/expenditure are written down to allow for proper resource allocation. Budgets are created for the sole purpose of planning, tracking and controlling the expenditures of a certain organization. The budget figures are usually estimates considering process of products or services keep varying from time to time.
Read also Variance Analysis of Labor and Material Costs
Variance reporting helps a company attend to the disparity and hence solve the conflicts as a result. Variance reporting happens after the end of a budget period. The company subsequently determines the actual costs and revenues in reference to the book sales and paid invoices. The actual cost is the exact figure that a product or service was bought or sold (Madura, 2015). The company assigns the actual figure and compares them to the budgeted figures.
The variance is calculated by subtracting the budgeted figures from the actual figures. There are a number of reasons for a variance. Unpredictable sale variations are one reason behind variance. It is inevitable that the price of certain products keeps changing from time to time due to factors such as; higher bargaining power by the buyers, promotion costs, among others (Bull, 2014). Two, is changes in material cost due to inflation, distance of supply, supplier power over buyer power, government interference, also the existence of many intermediaries. Three, is changes in labor costs. Employees occasionally require appraisals and wage raise to improve their morale in performance. When these appraisals happen, then these costs are calculated and expenditure and can lead to a detection of variance. However, all of these factors are usually calculated under the budgeted column.
Read also Variance – Managerial Accounting Presentation
Variance can be either advantageous or disadvantageous. It is considered advantageous when the total approximated amount is higher the actual cost. On the other hand, it is disadvantageous when the actual cost is higher the budgeted amount. In calculating variance, factors such as volume of sales and price changes are considered. The variance figures must be analyzed for the purpose of explaining the different figures. In analyzing, the values of material cost, revenue and labor are entered and the difference shown. Below is an example of variance report chart (Bull, 2014)
|Budget for the period 1 Dec 2016 to 28 Feb 2017||Actual cost for the period 1 Dec 2016 to 28 Feb 2017||Variance in Dollars||Variance in percentage|
From the above example, the variance is advantageous because the variance is positive. Even though the expenditure was higher by 29%, the income generated at that period was 40% thus the 42% surplus. The analysis of the variance report should be clear and precise. From the above example, the explanation for the variance in stationary can be: For the $2,000 variance in stationary materials was due to the unexpected supplier change. The report should be free from forgery or emotions.
Variance reports are useful in decision making. It is imperative that decision makers in a company base their decisions on figures. A variance report therefore helps in determining the remedy for a negative variance. In cases where the sales of a company have gone down, a manager can recommend the review of the sales strategy in place most especially the addition of more promotion methods (Madura, 2015). Thus, budgets can be customized to fit the circumstances. On the other hand if the total expenditure was more than the total income, then the manager is obligated to advise on the cost cutting strategy so as to improve the profit margins. Majorly, most companies are profit oriented and thus keeping track of the financial progress is their number one priority.
Read also How To Calculate – Average, Median, Standard Deviation, Variance, Hypothesis testing
Additionally, variance report helps in adjusting future budgets. With the entries and the analysis of the report, a company can be able to make predictions of what to budget for more or vice versa (Madura, 2015). Budget making is a very involving process that takes a lot of resources majorly time. And considering time is a valuable factor for profit making, saving it is made possible by the variance report. Among the factors of a good variance report are; consistency. A variance report should be consistent in the sense that the figures should relate with those in the book sales, the receipts and the invoices. Any variation of these figures is considered forgery. Additionally, the report should be time sensitive. That is it should be submitted in a responsive time to allow to full review and timely budgeting. Another factor is that the report should be satisfactory. In conclusion, in the real business world, small variances either positive or negative are typical. This is because most fields i.e. technology are changing each day.