Accounting - A task on variance analysis
A task on variance analysis
The following reports include the budgeted figures for Fun Run.
You are now provided with the actual figures and are asked to show the
variance and state whether it is favourable or not.
The first step in the process of variance analysis is to state the
amount of variance. For instance, if cleaning is budgeted for $6000 and you
actually pay $7000 then the variance is $1000.
The second step is to state whether this is favourable (F) or unfavourable
(UF). This process is 'mechanical' in that it does not allow for subjective
opinion. An increase in spending on advertising would be regarded as
'unfavourable' yet it may result in a substantial increase in sales. That
would be regarded as favourable.
The example for cleaning is shown.
The third step is to 'explain' why the variation took place. When making
this explanation you may have to consider an interrelationship with other
items. Often these items are contained in the relevant ledger accounts.
Take the case of debtors. The closing balance in the debtors account will
be affected by credit sales. An increase in credit sales has the potential
to increase the closing balance. However, cash received from debtors, bad
debts and discount reduce the debtors closing balance. An increase in
discount should encourage debtors to pay more quickly.
Improvement in sales may be related to increases in selling expenses such
as sales, salaries and advertising. It may also be due to an increase in
non-current assets, in particular new premises, motor vehicles or
equipment. In fact if certain expenses or non-current assets increase and
sales do not respond you have to challenge why that expenditure was
Learn to think in opposites. The explanation for debtors given above
applies in the same way to creditors. Because we are using the perpetual
stock approach you must link creditors to stock control. In a similar way
cost of sales, which reduces the stock control balance is linked to sales.
Sales may increase as a result of more units being sold, or as a result of
increased prices. If more units are sold then we would expect an increase
in cost of sales. This leads to changes in stock control and creditors (if
the stock is bought on credit).
View the text document for solution to the task on variance analysis.
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