Mar 10
23
When you consider that budgeting is nothing more than the best possible informed guess about the future, you have to expect some variance to arise. It’s inevitable. But it is not a sign of failure. The variance itself is not the problem. Variances can be positives if used correctly-to discover and reverse unfavorable trends. When an unfavorable variance does come up (and it will), it is not necessarily cause for alarm. It’s simply a signal that the time has come to fix a problem.
Too often, the variance itself becomes the bad news. So instead of fixing what the budget reveals, we find ourselves covering up, writing acceptable explanations, or blaming outside influences. The only real consequences of this is to neutralize the budget and bypass its intended control features.
What Variances Are Significant?
In deciding to track down both positive and negative variances and analyze their causes, you must address another question: Will you explain every variance, or only those that are significant? It doesn’t make sense to explain every account, when some will show variances of only a few dollars. Only the “significant” variance needs explanation. Too much unimportant detail is time consuming in preparation and review, and distracts from the value of a variance report.
How do you make the distinction? You need to set a policy (or, more precisely, ask top management to decide upon a policy and then impose it on each department) concerning the definition of a significant variance. This definition should apply to positive and negative variances, and should involve both the amount and the percentage of variance. For example, you could decide that a “signifi¬cant” variance is one that varies 10 percent or more from the budget, when the amount is $1,000 or more.
The amount and percentage should be modified up or down based on the volume of income, costs, and expenses, and on the outcome of the variance report. You should be able to spot a truly significant variance by simply looking at the amounts and percent¬ages as they fall.
