An effective part of budgetary control is to calculate and investigate variances from the budget.
Variance investigation:
Variances arise naturally in standard costing because a standard cost is a long-term average cost. In any period, actual costs may be higher or lower than standard but in the long run these should cancel out if the process is under control.
Variances may also arise because of:
- poor budgeting
- poor recording of cost
- operational reasons
- random factors.
An effective part of budgetary control is to calculate and investigate variances from the budget.
Variance investigation:
Variances arise naturally in standard costing because a standard cost is a long-term average cost. In any period, actual costs may be higher or lower than standard but in the long run these should cancel out if the process is under control.
Variances may also arise because of:
– Poor budgeting
– Poor recording of cost
– Operational reasons
– Random factors.
It is important to identify the reason for a variance so that appropriate action can be taken. The factors preventing the business entity from achieving its optimal level of performance can be ascertained, whereas the impediments to a successful business can be determined and the corrective measures be taken against them
For control purposes, management might need to establish why a particular variance has occurred. Once the reason for the variance has been established, a decision can then be taken as to what control measures, if any, might be appropriate:
– To prevent the adverse variance continuing in the future, or
– To repeat a favourable variance in the future, or
– To bring actual results back on course to achieve the budgeted targets.
Possible interdependence between variances:
In many cases, the explanation for one variance might also explain one or more other variances in which case the variances are inter-related.
For control purposes, it might therefore be necessary to look at several variances together and not in isolation.
