Analysing budgets

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  • Created by: hamishc
  • Created on: 20-04-16 21:38
What is variance?
The difference between actual figures and budgeted figures.
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What is a favourable variance?
When the revenue if higher than the budget says it is going to be.
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What is adverse variance?
When the revenue is lower than the budget says it is going to be.
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What is cumulative variance?
When variances are added up.
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Why are adverse variances a concern for the business?
It is extremely important to spot adverse variances, and find out which budget holder is responsible and take action to fix the problem.
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Why are favourable variances a concern for the business?
It may mean the budgets were not being stretched enough, so the business must set more difficult targets. Additionally, the business needs to find out why the performance is better than expected and share this information through all departments.
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What are 3 external causes of variance?
Competitor behaviour and changing fashions may reduce demand, changes in the economy can change wage costs, availability of raw materials.
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What are 3 internal causes of variance?
Improved efficiency, changes in the selling price after the budget is set, underestimation/ overestimation of costs.
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What is variance analysis?
The identifying and explaining of variances so action can be taken to fix them.
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Advantage of small variances?
Small (A) variances can motivate staff to catch up and fix the variances themselves. Small (F) variances can motivate staff to keep doing what they are doing to create a (F) variance.
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Disadvantages of large variances?
Large (A) variance can demotivate staff as they feel the task may be impossible to complete. Large (F) variance can demotivate staff as they don't see the need to work hard.
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What are the two ways businesses react to variances?
Change the business to match the budget, change the budget to match the business.
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What is the disadvantage of reacting to variances?
Changing budgets can remove certainty - one of the main advantages of budgeting.
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What are 5 decisions a business may make based on adverse variance?
Changing the marketing mix (e.g. cutting prices), streamlining production (makes business more efficient, reducing costs), motivation of employees, asking suppliers for a better deal, do better market research to improve forecasts.
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What are 3 decisions a business may make based on favourable variances?
Set more ambitious targets, try to replicate the cause of the favourable variance throughout the business (e.g. increased productivity), if sales are higher than predicted then increase production to meet demand.
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Other cards in this set

Card 2

Front

What is a favourable variance?

Back

When the revenue if higher than the budget says it is going to be.

Card 3

Front

What is adverse variance?

Back

Preview of the front of card 3

Card 4

Front

What is cumulative variance?

Back

Preview of the front of card 4

Card 5

Front

Why are adverse variances a concern for the business?

Back

Preview of the front of card 5
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