Accounting for Managers: Interpreting accounting information for decision-making

BUDGETARY CONTROL 227

variance under a flexed budget would then show:

Original budget Flexed budget Actual Variance

£80,000 £70,000 £73,500 £3,500 Adverse

40,000 @ £2 35,000 @ £2 35,000 @ £2.10

This is a more meaningful comparison, because the manager responsible for cost
control has spent more per unit and should not have this responsibility negated
by the effect of a reduced volume, which may have been outside that manager’s
control. Separately, the adverse effect of the volume variance – the difference
between the original and flexed budgets – is shown as 5,000 units @ £2 or £10,000.
This may be controllable by a different manager. As can be seen by comparing the
two styles of presentation, there is still a £6,500 favourable variance, but the flexed
budget identifies the two separate components of this variance:

ž£10,000 favourable variance (in terms of cost) because of the reduction in volume
from 40,000 to 35,000 units at £2 each. This is offset by
ž£3,500 adverse variance because the 35,000 units produced each cost 10p more
than the standard cost.

Variance analysis.......................................

An important part of the feedback process (see Chapter 4) is variance analysis.
Variance analysisinvolves comparing actual performance against plan, investi-
gating the causes of the variance and taking corrective action to ensure that targets
are achieved. Variance analysis needs to be carried out for each responsibility
centre, product/service and for each line item.
The steps involved in variance analysis are:

1 Ascertain the budget and phasing (see Chapter 14) for each period.
2 Report the actual spending.
3 Determine the variance between budget and actual (and determine whether it
is either favourable or adverse).
4 Investigate why the variance occurred.
5 Take corrective action.

Not only adverse variances need to be investigated. Favourable variances provide
a learning opportunity that can be repeated.
The questions that need to be asked as part of variance analysis are:

žIs the variance significant?
žIs it early or late in the year?
žIs it likely to be repeated?
žCan it be explained (and understood)?
žIs it controllable?