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
Considering the following information, what is the price of the share as per Gordon’s Model? Details of the Company Net sales Rs.120 lakhs Net profit margin 12.5% Outstandin

Q. Board of Directors Board of Directors - Individuals responsible for overseeing the affairs of an entity including the election of its officers. Board of a CORPORATION which

As the number of companies borrowing directly from the capital market increases, and as the industrial environment becomes more and more competitive and demanding,

What is the market risk premium in Spain at the present moment - the number which I have to use in the valuations? It is not possible to talk of "the" market premium for Spain.

Mr. James K. Silber, an avid international investor, just sold a share of a French company, for FF50. The share was bought for FF42 a year ago. The exchange rate is FF5.80 each U.S

Linear programming, one of the important techniques of operations research, has been applied to a wide range of business problems. This techniqu

Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain. Bankers and another lenders use li

How would you explain economic exposure to exchange risk? Answer: Economic exposure can be illustrated as the opportunity that the firm’s cash flows and so its market value may

Performance budget: it involves evaluation of the performance of the organization in the context of both overall and specific objectives of the organization. As per the National I

Cost of Retained Earning: - It is on occasion argued that retained earnings carry no cost since a firm isn't required to pay dividend on retained earnings. Nevertheless this isn't