VARIANCE ANALYSIS AS AN EFFECTIVE TOOL FOR BUDGETING IN AN ORGANIZATION
ABSTRACT
The use of variance analysis as an accounting information
is usually a problem confronted by management whether or not it serves
as a control tool in budgeting. This study therefore identifies the
importance of variance analysis in budgeting control, also examined the
usefulness of variance analysis as an effective tool in budgeting and
also provide data/operational models for management control in
budgeting.
The production cost of the business organization was
analyzed using the One-way ANOVA for its budgeted and actual Output,
while the sales was analyzed using the Two-way ANOVA for three
difference months. The study showed no significant differences both for
production and sales but revealed variance in production costs and sales
which should be a worry for the management.
Consequently, the study
proposed among other things, that production department should strive to
achieve full utilization of capacity, also management should not why
rely solely on accounting target/numbers in evaluation of performance
because a successful completion of operation comprises several
components that interact together.
TABLE OF CONTENTS
CHAPTER ONE
INTRODUCTION
STATEMENT OF PROBLEM
OBJECTIVE OF THE STUDY
STATEMENT OF HYPOTHESIS
SCOPE OF THE STUDY
SIGNIFICANCE OF THE STUDY
LIMITATIONS OF THE STUDY
CHAPTER TWO: LITERATURE REVIEW
INTRODUCTION
BUDGETING IN BUSINESS ORGANISATION
VARIANCE ANALYSIS
ROLES OF VARAINCE ANALYSIS AS A BUDGETARY TOOL IN BUSINESS ORGANISATIONS
CONCLUSION
CHAPTER THREE: METHODOLOGY
3.0 INTRODUCTION
RESEARCH DESIGN
POPULATION AND SAMPLING
3.3. SOURCES OF DATA
RESEARCH INSTRUMENT
OPERATIONALISATION OF TERMS
MODEL SPECIFICATION AND DATA ANALYSIS PLAN
CHAPTER FOUR: DATA ANALYSIS AND PRESENTATION
INTRODUCTION
PART I: DATA ANALYSES AND INTERPRETATION OF PRODUCTION
PART II: DATA ANALYSIS AND INTERPRETATION OF SALES
DISCUSSION OF FINDINGS
CHAPTER FIVE
5.0 INTRODUCTION
5.1 SUMMARY OF FINDINGS
5.2 CONCLUSION
5.3 RECOMMENDATION
BIBLIOGRAPHY
CHAPTER ONE
INTRODUCTION
In budgeting, a variance is the difference between, planned or standard amount and the actual amount incurred or sold. Variance can be computed for both cost and revenues. The concept of variance is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company (Wikipedia, 2009).
Variance Analysis is the analysis of performance by means of variances used to promote management action at the earliest possible stages (answers.com, 2012). After a budget (based on standard costs) has been set, its usefulness lies in the review procedures which compare actual results against the budget. Variance Analysis is the process of examining in detail each detail variance between actual and budgeted/expected results were not met (material costs too high, sales prices too low etc).
The budget and variances analyzed in this research work reflects management plans. If all goes according to plans, there will be little difference between actual results and the result that would be expected according to the budget and standards. If this happens, manager can concentrate on other issues. However, it actual results do not conform to the budget and to standards, the performance reporting system sends a signal to the management that an “exception” has occurred. This signal is in the form of a variance from the budget or standard.
Furthermore, it is important to note that not all variance are worth investigating because, it would make management waste a great deal of time tracking down nickel-and-dime differences. Variances may occur for any of a variety of reasons, only some of which are significant and warrant management attention. For example, hotter than normal weather in the dry season may result in higher than expected electrical bills for air conditioning or workers may work slightly faster or slower on a particular day because of unpredictable random factors, on can expect that virtually every cost category will produce a variance of some kind.
However, there are clues which makes a manager decide which variance are worth investigating. One of the clues are size of the variance. A variance of #500 (five hundred Naira) is probably not big enough to warrant attention, whereas a variance of #5,000,000 (five million Naira) might well be worth tracking down. Another clue is the size of the variance that is only 0.196 percent (%) of spending on an item is likely to be well within bounds, one would normally expect due to random factors. On the other hand, a variance of 10 percent (%) of spending is much more likely to be a signal that something is basically wrong.
Variance Analysis is vital to good management. You have to track follow up on budgets, mainly through Variance Analysis, or the budgets are useless. In general, going under budget is a positive variance, and over budget is a negative variance. But the real test of management should be whether or not the result was good for business. (TimBerry, 2012).
Every variance should stimulate questions. Why did one project cost more or less? Where objectives met? Is a positive variance a cost saving or a failure to implement? Is a negative variance a change in plans, a management failure, or an unrealistic budget? A variance table provides management with significant information. Without data, some of these important questions might go unasked.
The presentation of variance shows how important good analysis is. In theory, the positive variances are good news because they mean spending more than budget thus, in summary, a positive variance in expense item is bad, while a positive variance analysis for revenue items are good, this will be further explained in this study.
STATEMENT OF PROBLEM
Many business organization ignore or forget the other half of the budgeting. Budgets are often proposed, discussed, accepted and forgotten. Variance Analysis looks after-the-fact at what caused a difference between plan vs actual. Some management doesn’t look at what the difference mean to the business (TimBerry, 2012).
Indeed, management spend a significant amount of time each year looking forward to create an operating budget so that it may chart the course of the following year, forgetting the accounting close process must identify all significant variance this plan using a threshold with naira or a percentage and report them immediately so that management can either correct the root cause of the variance or revise its forward planning. Poor Variance Analysis allows errors, fraud and operating anomalies to go unreported, uncorrected and unexplained (Sid Harris, 2012).
OBJECTIVE OF THE STUDY
The specific objectives of this research work are:
To identify the importance of variance Analysis in budgeting control.
To examine variance based on pre-determined and actual production cost likewise sales/revenue.
And to provide data/operational models (for management) as a tool for management control in budgeting.
STATEMENT OF HYPOTHESIS
Hypothesis I
H0: That there is no significant difference between expected and actual production cost
H1: That there is a significant difference between expected and actual production cost.
Hypothesis II
H0: That there are significant differences between the sales of three consecutive different months.
H1: That there are significant differences between the sales of three consecutive different months.
SCOPE OF THE STUDY
Variance Analysis is mostly of importance to manufacturing industries which doesn’t have complexity in its business activities and this research work will cover the production cost and Revenue/Sales for five different months of a manufacturing firm situated in Nigeria.
SIGNIFICANCE OF THE STUDY
This study will help to:
Give a true picture on the importance of variance Analysis in budgeting control.
To suggest Variance Analysis as an effective tool in budgeting.
To identify the problems of poor variance Analysis which allows errors, frauds to go unreported, uncorrected and unexplained.
LIMITATIONS OF THE STUDY
One of the major limitations of this study is that the period of time given by the institution’s authority for the study would not allow for an in-depth coverage of all the issues connected with the topic understudy, and the collection of related information.
Also, certain information required in order to highlight and analyze some observation may not be accessible e.g. product Revenue reports, order logs may be regarded as strictly confidential and would not be divulged to the research. And lastly, finance is another constraint to an indebt study of this topic.
