So a Budget is basically a necessary tool for implementing the objectives of the company. In the starting of every financial year, a budget is prepared keeping in mind the aims and objectives of the company and this process is known as budgeting. All the departments are required to give their inputs which is used for the preparation of budget.
WHAT IS VARIANCE ANALYSIS?
After the preparation of Budget at the beginning of the year, actual results with comparison of the Budget is analysed at defined interval in the organisation. There are obviously some variance between the two and these variance are identified through the process of Variance Analysis. After this analysis the management further researches on factors leading to such variances and hence helps in controlling the business and costs under check.
VARIOUS TYPES OF VARIANCES
- Purchase price variance: As per the budgetary analysis if the price of the material that is required to be purchased varies from the actual price that results in purchase price variance. It is used for procuring efficiently the raw material so that there is no variance in the actual price and Budgetary price.
- Labour rate variance: The price at which the labour is hired and the price as per the Budgetary analysis if there is a difference between the two then this analysis plays a key role in discovering various factors resulting in such difference. The variance could be positive if the cost as per the budgetary analysis was high but he cost of actual labour is low and when variance is negative then the cost of purchasing is higher but the budgetary analysis was low. This analysis helps in taking key decisions for future projects.
- Material yield variance: It is the difference in the actual material quantity and the stand material quantity in the course of production and then multiply it by standard cost of such materials.
- Volume variance: It is the difference between actual quantity that is sold to the quantity that was expected to be sold as per budget and multiplied by the per unit standard price. This variance helps in analysing the volume of products as per the budgetary analysis.
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