Budget – The Variances
Bringing the Budgets Together
Once the Materials Purchase budget (no.3), the Staff budget (no.4) and the Overheads budget (no.5) has been compiled, they can be put together to be summarized in a Production Cost Budget.
To obtain a clearer view of this, and how the whole budgeting system fits together, visit: The Budget Hierarchy (A new window will be opened)
Using Budgets – The Variances
When putting budgets into practice, it is more than likely that your budgeted figures will not be the same as the actual figures that you obtain.
This may be due to calculation errors, changes in plan, or purely down to external factors out of your control such as interest rates and fluctuations in demand. These differences are known as VARIANCES.
When following the budget it is important that you keep it in your control at all times, therefore these variances are not to be ignored but acted upon straight away, even if they are favourable. These variances are calculated simply by:
If the actual figure is more favourable than the budgeted figure, it is often reported stating the letters FAV (favourable). Likewise, if the actual figure is worse than the budgeted figure, it is reported stating the letters ADV ( adverse) .
For Example, the sales budget (revenue) may end up like the one below for a particular month:
| (£) | Budgeted Figure | Actual Figure | Variance | Result |
| Product A | 500 | 450 | - 50 | ADV |
| Product B | 600 | 620 | 20 | FAV |
| Product C | 400 | 500 | 100 | FAV |
For variances that are extremely small (causing no real affect to cash flow), these issues can be overlooked: you can expect some degree of variance in most figures. For those variances that are significant, having some negative impact on cash flow, it is important that an investigation be carried out straight away. It may be too late to recover the difference but if you figure out the cause of the issue, it will help prevent the problem from occurring again in the future. It may be that demand has fallen creating fewer sales than expected and therefore a step up in marketing could be the solution or a change in pricing strategy. You may have to re-write the budget to compensate for any immediate changes.
If the variance is significantly favourable, investigate why this has happened. Is there anything you can do to make these figures even more favourable?
Do not forget- income figures will be favourable when the actual figure is HIGHER than the budgeted figure: expenditure figures are more favourable when the actual figure is LOWER than the budgeted figure.
The moral of this section is that the budget should never be put to one side once written: it will need to be closely followed and maintained. Any issues need to be acted upon as soon as possible, whether favourable or adverse.
Article Index
- Cash Budget
- Budget Preparing
- Sales and Production Budgets
- Staff and Capital Expenditure Budget
- Budget – The Variances
- Cash Budget
- Related Articles
