Variances

• What is a key word to understand when looking at budgets?

  Variance
• What does a variance arise from?

  A difference between actual and budget figures
• What are the types of variances?

  • Positive favourable (better than expected)
  • Adverse unfavourable (worse than expected)
• What might a favourable variance indicate?

  Costs were lower or revenue higher than expected
• Should variances be a concern for management?

  It depends on various factors
• What might an adverse variance arise from?

  Higher costs or lower revenue/profits than expected
• What factors determine the significance of a variance?

  • Whether it is positive or negative
  • Was it foreseen or foreseeable?
  • Absolute size (in monetary terms)
  • Relative size (in percentage terms)
  • The cause of the variance
  • Temporary problem or long-term trend
• What is "management by exception"?

  Focusing on activities needing attention
• How does budget control facilitate management by exception?

  It highlights areas not in line with expectations
• What should be done with items showing small variances?

  No action is required on small variances
• Are all adverse variances necessarily bad news?

  No, they can indicate positive outcomes
• What might cause an adverse variance to occur positively?

  Higher production costs due to increased sales
• What matters most regarding a variance?

  The cause and significance of the variance