Content:
When a budget is in place for each department, the management has criteria against which success can be measured...
Analysis:
Budget holders will try to exceed revenue budgets or stay under cost targets. Budgeted figures will be compared with what actually happens in store so that the owner can make a judgement on the businesses performance. They will use variances which tell you the amount by which the result differs from the budgeted figure. They are referred to by ADVERSE and FAVOURABLE variances. An ADVERSE variance is one which is performing lower than expected profit and a FAVOURABLE variance is one which is performing higher.
Application:
If the business has regular variance statements then they can monitor the bad parts of the business and put a strategy into place which will help to improve the business over the year. For example; they could find something wrong in April, put a strategy in by May and you may see improvements by September. But that’s only if it’s that easy in your business. It could take longer!!
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