Variance analysis of budget, Financial Management

Variance Analysis:

In its commonest form variance analysis is the process of comparing budgeted financial performance (or financial goals) against actual financial performance.

During the budget process the organisation would have set financial targets for each particular area of revenue or expense.  In the context of project budgeting, the targets are the expenditure limits that were identified during the budget development process.

Against these targets, actual performance is compared and the variance between the two recorded.

By analysing the variance, organisations can quickly see which areas are exceeding expectations, meeting expectations, or failing to meet expectations. Armed with such information, management can take corrective action. In the context of total business performance, variance analysis is generally scheduled to occur at the same time the preparation and communication of profit and loss statement, or cash flow statements, are scheduled. In the context of project budgeting, it is likely that separate variance analysis scheduling will occur and shorter intervals (and depending on the project) to ensure performance against expectations is maintain and avoid the potential for a budget blow out.

An example of a budget variance analysis could be as follows:

Variance Analysis - Relocation Project Sep 200X

J & J Real Estate 

Item Description

Budget ($)

Actual

Variance ($)

Variance (%)

Purchase Price

550,000

700,000

150,000

27.3%

Purchase Costs

30,000

45,000

15,000

50%

Repairs/Fit Out

150,000

80,000

-70,000

-46.6%

Relocation Costs

20,000

10,000

-10,000

-50%

Business Interruption

10,000

0

-10,000

-100%

Marketing Campaign

5,000

1,000

-4,000

-80%

Stationery

5,000

5,000

0

0%

Total

770,000

841,000

71,000

9.2%

The previous example is deliberatly designed as an end of project analysis where all expenditure is compared and variations against budget recorded. In reality, there would be a number of scheduled comparisons throughout the project. The project team would be required to breack total budget down into monthly (or even weekly) levels to enable continuous tracking to take place. In doing so, the organisation can anticipate problems as they arise and take measures to alleviate the impact or reallocate funding accordingly.

Posted Date: 10/1/2012 4:23:13 AM | Location : United States







Related Discussions:- Variance analysis of budget, Assignment Help, Ask Question on Variance analysis of budget, Get Answer, Expert's Help, Variance analysis of budget Discussions

Write discussion on Variance analysis of budget
Your posts are moderated
Related Questions
Q. Disadvantages of just-in-time inventory management? A JIT inventory management system mayn't run as smoothly in practice as theory may predict since there may be little room

Revenues Revenues are the gross income received before any deductions for discounts, expenses, returns, and so on. It is also called sales in most organization. A much less c

Q. Advantage of Profitability Index method? Advantage of PI method:- (i) Similar to the other DCF techniques the PI method as well takes into account the time value of money

Reference Index Every FRN chooses its own reference index upon which the calculation of each successive new coupon is based. The most commonly used reference index is LIBOR. It

Long- T er m Debt Long-term debt is a debt obligation that has a maturity from the date the obligation was incurred of more than one year. The debt obligation com

Q. Show Gross Vs net working capital? The distinction between the gross working capital or the net working capital does not in any way undermine the relevance of the concepts o

XYZ Ltd is a group of doctors, dentists, professional sports players and celebrities with excess funds who wish to find small companies with great innovative ideas and invest in th

1. Collect three years of recent, financial data (2007 - current), including the Balance Sheet, Income Statement, and Statement of Cash Flow. a. REQUIRED - paper copies o

Individual/Borrower Rating This includes rating a borrower to whom a loan/credit facility may be sanctioned.

Banks like to make short-term, self-liquidating loans to businesses.  Why? Banks like to be capable to see where the funds are similarly to come from like the borrower is able to