Unit 2 D3
Unit 2: Business Resources Amy Doherty
D3: Benefits & Drawbacks of Variances
Variances can be defined as “A measurement of the spread between numbers in a data set. The variance measures how far each number in the set is from the mean.”1 A variance can be adverse or favourable. An adverse variance is when the actual financial figures for a business are worse than forecasted and a favourable variance is when the actual figures are better than budgeted.
A budget is an documented summary of likely income and expenses for a given period. It is important because it helps a business you determine whether they have the money to spend on certain things or not, and if they need to spend more in certain areas. It is created using a spreadsheet, and it provides a concrete, organized, and easily understood breakdown of how much inflows and outflows of money that is going through the business. It’s an helpful tool to help you prioritize your spending and manage your money.
Adverse variances may occur because of poor budgeting or a business not considering external factors which may affect them such as a recession. However, they could occur for reasons other than poor accounting and budgeting. An adverse variance could also occur because a business only realises that they will be making more sales than forecasted which means they have to buy more raw materials than expected. The will make an adverse variance for raw materials and a favourable variance for sales so this doesn’t necessarily mean that a business has gone wrong anywhere it could just be that a demand for a product was needed after they had budgeted and made the forecasts.
Advantage of variances:
Variances will help a business to judge the performance and see how well it is doing financially. However, when doing this, they must ensure that they take care not to make any mistakes or assumptions and compare it to other data gathered throughout the year. If a business knows if they are doing
D3: Benefits & Drawbacks of Variances
Variances can be defined as “A measurement of the spread between numbers in a data set. The variance measures how far each number in the set is from the mean.”1 A variance can be adverse or favourable. An adverse variance is when the actual financial figures for a business are worse than forecasted and a favourable variance is when the actual figures are better than budgeted.
A budget is an documented summary of likely income and expenses for a given period. It is important because it helps a business you determine whether they have the money to spend on certain things or not, and if they need to spend more in certain areas. It is created using a spreadsheet, and it provides a concrete, organized, and easily understood breakdown of how much inflows and outflows of money that is going through the business. It’s an helpful tool to help you prioritize your spending and manage your money.
Adverse variances may occur because of poor budgeting or a business not considering external factors which may affect them such as a recession. However, they could occur for reasons other than poor accounting and budgeting. An adverse variance could also occur because a business only realises that they will be making more sales than forecasted which means they have to buy more raw materials than expected. The will make an adverse variance for raw materials and a favourable variance for sales so this doesn’t necessarily mean that a business has gone wrong anywhere it could just be that a demand for a product was needed after they had budgeted and made the forecasts.
Advantage of variances:
Variances will help a business to judge the performance and see how well it is doing financially. However, when doing this, they must ensure that they take care not to make any mistakes or assumptions and compare it to other data gathered throughout the year. If a business knows if they are doing