5.2g - Variance Analysis

Question 1

Variance analysis definition

Answer 1

Where an actual figure differs from that expected in a budget

Question 2

Favourable variable analysis definition

Answer 2

When costs are lower than expected or revenue is higher than expected

Question 3

What decisions can be made as a result of favourable variances?

Answer 3

• If it is caused by a pessimistic budget, set more ambitious targets
• Find what was responsible for improvement and do more of it

Question 4

Adverse variable analysis definition

Answer 4

When costs are higher than expected or revenue is lower than expected

Question 5

What decisions can be made as a result of adverse variances?

Answer 5

• Change marketing mix
• Streamline production to become more efficient
• Motivate employees to work harder
• Cut costs by asking suppliers for a better deal

Question 6

What is variance analysis used for?

Answer 6

• Find out what went right or wrong

- Inform decision making

Question 7

What are the external causes of variance?

Answer 7

• Actions of competitors
• Changes in economy
• Costs of raw materials

Question 8

What are the internal causes of variance?

Answer 8

• Improving efficiency
• Overestimating amount it could save by streamlining production
• Underestimating the cost of making a change
• Changing selling price