Question

Short answer please

When should we investigatevariances in actual results vs. budget?

Answer 1

Answer:-

Definitions:-

Budget:-Budget is a guess or an expectation.For example,when you go out to buy grocery for a month,you guess how much would be an expense and savings accordingly.

Actual:-Actual is the real expense which you incur.

Variance:- Variance is the difference between the budgeted and actual.

Reasons to investigate variances are as follows:-

1. When the difference between budgeted results and actual results is above a certain amount.For example,when the price per kg of any raw material in business is expected to be 5$/kg but actual price expended towards it comes to 8$/kg the variance per kg for price is 3$ which is above a certain expectation.So investigation of the same is needed.
2. Investigation of a variance is necessary when the same was controllable.For example,if in the above example,variance of 1$ is acceptable and may be uncontrollable due to many reasons like government changes or inflation not taken into consideration.,etc.However,2$ may be controllable by certain measures for eg., if contracts are entered into with vendors or appropriate stock level is maintained,etc.