Variance Analysis is used to promote management action in the earliest stages. It is the process of examining in detail each variance between actual and budgeted costs to conclude the reasons as to why the budgeted amount was not met (Ventureline, 2012). There are several factors that go into a variance report. One is the assumption of the department. The second is the risk of the assumption. And thirdly the actual expense used to portray the budget. The vice president announces the budget that needs to be met monthly. Upon receiving the monthly budget results, the materials budget was not used properly, and the salary was higher than the planned budget. I will be explaining the reasons as to why the salary bases were higher than the given amount, and the reasons why the materials budget were not met, and also what needs to be done in future to prevent from having to exceed the salary amount.
When receiving the monthly budget at the beginning of the month, the managers have to assume how to use the budget amount given wisely. Given that the employees need materials to get the job done, there are separate budget amounts for specific areas that need to be dispersed accordingly. For example, working at a health care industry in the materials management department, the supplies that are needed for the department need to be available in order for the department to run such as: computers, handheld inventory scanners, and carts. Some of these items have already been purchased prior to when the facility was open for business, and the life span for some items such as carts, have a long life spam, therefore planning the budget for supplies monthly, sometimes does not need to be met, because all the supplies needed has already been supplied for the employees already. Under budgeting is a safe assumption for this specific department because it would save money for the department in the long run. For example if one of the carts broke, and cannot be repaired, they would have enough in the budget to supply the department with a new cart. Another factor that needs to be considered in the variance report would be the salary that is paid towards the employees.
Given that the employees get paid a certain amount each pay period, it makes it easy for the manager to assume how much of the given budget needs to be used to pay them. But there are some risks that come along with the assumptions such as: annual reviews, and hiring more employees to help the department. The manager will either exceed the budget amount for the month or go under the budget depending on the situation. When preparing a variance report to the vice president, the manager would have to incorporate the reasons as to why the budget is either under or over the budget for the month. If the manager has several employees that reach their annual reviews for that month, they also review an annual incentive as well. Depending on the company the increase could be between 2% all the way up to 10% raise for the current employees. The manager would have to include the reasons as to why the variance amount was high on that month.
And if the manager needs a new hire for the department, they would have to get approval from the vice president in order to see if it is in the budget, once they have approved, the manager is able to hire a new employee, and make sure that the new hire gets paid according to what the budget allows them to pay for the new hire. This is considered a risk as well. The manager would have to meet with the human resources department to make sure that the new hire and the company all agree on the approved budget for the department. To prepare the variance report for the vice president regarding to the example given, the manager would have to explain why the salary was high, and the budget for the supplies are under budget. In the variance report, the manager would have to compare and contrast the numbers from previous months and verify the reasons why the salary is high.
As I stated before the supplies budget is not always going to be met due to the life span of the supplies used in the department. I would suggest that maybe the supply budget needs to be lowered and the salary budget increased in order to balance out the difference. The variance report is important for any business in order to keep the budget under control. It also shows the areas where the budget is used. The variance report factors into the budget expense, actual budget used, and the variance amount is the difference.
There are many risks that involve the actual expenses used in the department. Such as: new employees, or annual reviews for current employees. Depending on the situation, the budget can either be met, or it be under the budget amount given. While preparing the variance report, the manager would have to compare and contrast previous months in order to determine the difference of where the actual expense was used if it was higher than the budget given. All these factors need to be in place in order to find out why the salary is higher than the budget given to the manager.