TLIP5035A Presentation 9

PRESENTATION 9: IDENTIFYING AND ANALYSING VARIANCES

PRESENTATION 9 OUTLINE

The following areas are covered in this presentation:

• Performance Monitoring and Variance Identification

• Variance Analysis

• Calculating Variances

• Analysing Variations

PERFORMANCE MONITORING AND VARIANCE IDENTIFICATION • Performance is best monitored continuously via a budget report that shows

variances between what has been budgeted for and what is the actual

revenue and expense

• The use of a spread sheet as a budget performance report is useful in

being able to spot variances immediately.

• Variances can be favourable and unfavourable and have the opposite

meaning for revenue and expense.

Favourable variance in revenue: sales higher than

budgeted for

Unfavourable variance: actual revenue is less than budgeted

amount

Expense variances: favourable if they are less than budget, unfavourable if they exceed

budget

PERFORMANCE MONITORING AND VARIANCE IDENTIFICATION

• It is ideal to be able to identify variances on a real-time basis, in

other words on an evolving budget spread sheet or report.

• A budget spread sheet set out for a twelve-month period will have

the actual figures for income and expenses (both fixed and

variable) entered on a monthly basis. Any variances can be

calculated immediately. Year-to-date variances will also be shown

and any trend can be spotted.

• A manager will also have a tolerance for variance level and the

number of concurrent variances in the same account. Naturally

any large variance must be investigated quickly but small

variances that occur infrequently may not require any action

PERFORMANCE MONITORING AND VARIANCE IDENTIFICATION • A section of a budget spread sheet is show below

INCOME JUL AUG SEP OCT

storage $30,000 $40,000 $35,000 $36,000

unpacking $2,000 $1,000 $2,000 $2,000

lift on lift off

$3,000 $1,000 $1,500 $2,000

other

TOTAL $35,000 $42,000 $38,500

BUDGET $35,937.5 $35,937.5 $35,937.5

Variance -$938 $6,063 $2,563

Variance % -2.6% 16.9% 7.1%


INCOME JUL AUG SEP OCT

storage $30,000 $40,000 $35,000 $36,000

unpacking $2,000 $1,000 $2,000 $2,000

lift on lift off $3,000 $1,000 $1,500 $2,000

other

TOTAL $35,000 $42,000 $38,500 $40,000

BUDGET $35,937.5 $35,937.5 $35,937.5 $35,937.5

Variance -$938 $6,063 $2,563 $4,063

Variance % -2.6% 16.9% 7.1% 11.3%

Budgeted income per month is $35,937.50 from all sources

Income for July is under and shows a negative variance of 2.6% and is

therefore unfavourable

August revenue has revived and is above budget by 16.9%

The revenue for the following two months is also above budget.


• Lets look at the expenses budget section of the spread sheet

• You will notice an increase in accountancy over budget for one

month before it returns to budget

BUDGET BUDGET ACTUAL

EXPENSES ANNUAL MONTH JUL AUG SEP OCT

accountancy $2,060 $171.7 $200 $171.7 $171.7 $171.7

advertising $300 $25 $100 $0 $0 $100

bank fees $300 $25 $20 $30 $28 $30

casual labour $1,500 $125 $0 $0 $0 $0

computer/office

$1,000 $83 $0 $200 $45 $50


• Lets look to the end of the year to see if any of these items

showed annual variances

• Accountancy expense shows that accountancy was over budget by

0.7%. As it is over budget and an expense it is considered a

negative (unfavourable) variance. Advertising however remained

completely on budget over the year (i.e. the budget allowed $300

annually and actual cost was also $300), which for an expense

item is favourable behind being under budget.

APR MAY JUN Year to Date VARIANCES %

accountancy $100 $100 $171.7 $2,074 -$14 -0.7%

advertising $0 $0 $0 $300 $0 0.0%

bank fees $20 $25 $35 $313 -$13 -4.3%

casual labour $0 $0 $0 $2,250 -$750 -50.0%

VARIANCE ANALYSIS• Variances are analysed as a method of ascertaining the level of

achievement of planned budgets. This needs to be done as the

budget unfolds, usually over a monthly period.

• Longer periods are accepted but there is little point in doing the

analysis of variance at the end of the year, especially if the variances

have resulted in a negative impact on the company’s financial

performance

• Variance analysis will lead to possible solutions to problems that were

not known at the time the budget was being put together, or are

indicative of trends that have crept in over time.

• Reasons for variances in sales revenue are usually due to lower

volumes sold, or lower prices charged than was budgeted. This may

require the budget to be altered to reflect such trends. The reasons

behind lower sell prices also need to be investigated.

VARIANCE ANALYSIS

• Overall variance analysis needs to be looked at (usually by

managers) to spot any trends, especially those resulting in higher

overheads and costs and lower sales revenues.

• Both trends have negative impacts on a business. Remedial action

also needs to be timely, hence the need for rapid inflow of

accounting information to enable the budget to be watched and

analysed.

VARIANCE ANALYSIS

Example 1

• Navigate to the waste disposal result below from the budget

spread sheet shows a major variance (negative) of 260%

• Clearly, a major rethink is required for next year’s budget when

assessing this particular expense. If this account had been looked

at midyear, it would show that it was already running well over

budget. At that time an adjustment should have been made to the

budget.

Year to Date VARIANCES %

waste disposal $1,800 -$1,300 -260.0%

workcover $10,300 $0 0.0%

VARIANCE ANALYSIS

Example 1

• In terms of risk assessment and contingency plans, this example

indicates that the risk as identified has been accepted instead of

avoided, controlled or transferred.

• The actual reason for an increase in waste disposal charges may

well be a result of an extra activity within the company and

possibly can be charged back to clients.

• All variances of such a magnitude need investigation in any case.

The actual amounts themselves are small in terms of the overall

turnover of the company too. The contingency plans may include a

charge back option in addition to an increase to the expense

budget.

VARIANCE ANALYSIS

Example 2

CJS Plastics (Drums) Monthly Sales Budget 2012-13

MONTH JULY AUG SEP YEAR

Past pattern of sales

5.8% 8.1% 9.2% 100%

Large Drum Sales 12 16 18 200

Price $600 $600 $600 $600

Revenue $7,200 $9,600 $10,800 $120,000

Small drum Sales 20 28 32 350

Price $400 $400 $400 $400

Revenue $8,000 $11,200 $12,800 $140,000

TOTAL REVENUE $ 15,200 $ 20,800 $ 23,600 $260,000

VARIANCE ANALYSIS

Example 2

• Performance should be monitored continuously, and systematically,

but HOW OFTEN should performance be monitored?

• This is a matter of judgement, depending on the nature of the

organisation. Performance could be monitored quarterly, monthly, or

weekly. Managers can monitor the performance of a business by

comparing actual performance against the targets contained in the

budget.

• A budget “variance” is the difference between planned and actual

performance. Managers monitor variances to make sure that costs

do not run out of control, profit targets are kept in mind, and to

identify circumstances where the business strategies might need to

be reviewed.

VARIANCE ANALYSIS

Example 2


MONTH: JULY Budget Actual

Past pattern of sales 5.8%

Large Drum Sales 12 14

Price $600 $600

Revenue $7,200 $8,400

Small drum Sales 20 17

Price $400 $400

Revenue $8,000 $6,800

TOTAL REVENUE $ 15,200 $15,200

CALCULATING VARIANCES

Step One: Calculate the Variances

Variance = Actual – Budget


MONTH: JULY Budget Actual Variance


Large Drum Sales 12 14 2

Price $600 $600 $0

Revenue $7,200 $8,400 $1,200

Small drum Sales 20 17

Price $400 $400

Revenue $8,000 $6,800

TOTAL REVENUE $ 15,200 $15,200

CALCULATING VARIANCESStep Two: Calculate the percentage (%) variances


MONTH: JULY Budget Actual Variance Variance %


Large Drum Sales 12 14 2 17%

Price $600 $600 $0 0%

Revenue $7,200 $8,400 $1,200 17%

Small drum Sales 20 17 -3 -15%

Price $400 $400 $0 0%

Revenue $8,000 $6,800 -$1,200 -15%

TOTAL REVENUE $ 15,200 $15,200 $0 0%

% Variance = (Actual – Budget)

X 100Budget

ANALYSING VARIATIONS• Budgets are not a forecast of future performance. Budgets are a ‘plan

of action’ for future performance based on assumptions about future

conditions, therefore variation is to be expected!

• Variations are examined to help keep the plan on track, or If

circumstances have changed, to adjust the plan accordingly (apply

contingencies).

• Variations are often coded as either:

− F = Favourable

− U = Unfavourable

• Variations and percentage variations, help draw managers’ attention

to the variations that have the largest effect on the achievement of

the business plan. Small variances can be safely ignored. This is

called management by exemption.

ANALYSING VARIATIONS• Managers need to investigate the CAUSES of variations:

For example:

• Total revenue and the cost of goods sold will be sensitive to changes in the

VOLUME of sales

• Operating expenses will be less sensitive to changes in the volume of

sales.

Total revenue

Variable cost

Fixed cost

Total cost,

Breakeven

CVP Analysis

Total revenue

COGS

Gross profit

Operating expenses

Operating profit

ANALYSING VARIATIONS

• Managers need to consider whether variations in revenue or the

cost of goods sold (the variable costs) are due to:

Quantity (or volume) changes

− Changes in the quantities of goods and services sold

− Changes in the quantities of direct materials purchased or

direct labour employed

OR

Price Changes

− Changes in the prices of goods and services sold

− Changes in the prices of direct materials purchased or direct

labour employed

ANALYSING VARIATIONS

• Managers ALSO need to consider whether variations in revenue or

the cost of goods sold (the variable costs) are able to be

controlled, or not able to be controlled.

• Variance analysis or reporting can be conducted within the

organisation either within the finance department utilising budget

or audit/compliance specialists or from an operational perspective

by the operation manager(s).

TLIP5035A Presentation 9

Education

Transcript of TLIP5035A Presentation 9