Using Variance Analysis in Decision Making
A good budget is built with thoughtful consideration of future costs and revenue. Though your budget is formulated with expected figures in mind, the actual resulting values may vary considerably. This variance–from projected to actual–can be a pleasant surprise or a fiscal nightmare and can make financial decision making difficult. Fortunately, variance analysis can enable management to determine why variance occurred and what can be done to mitigate its effects.
For this Assignment, use the information below to run a variance analysis. Based on the information you obtain through the analysis, write a 3-page paper that includes the following:
•A description of the results of the analysis.
•Suggestions as to potential causes of the budget variances.
•An explanation of approaches for addressing the situation.
•An explanation of the importance of variance analysis in making data-driven decisions.
Note: For those Assignments in this course that require you to perform calculations you must:
•Create an Excel spreadsheet containing the information provided.
•Show all your work.
•Answer any questions included with the problems (as text in the Excel spreadsheet).
For those not comfortable with the use of Microsoft Excel, this week’s Optional Resources suggest several tutorials.
To prepare:
•Review the information in this week’s Learning Resources (including the Media) dealing with variance analysis, how it is calculated, and how it can be used in decision making.
•Carefully examine the information in each of the scenarios below and consider how calculations using this information can be used to answer the questions asked.
This Assignment will be due by Day 7 of Week 9. Be sure and include all of your calculations.
Salary Variance Scenario
Using the following performance data, calculate the volume adjusted labor rate variance and volume adjusted efficiency variance. The department’s labor costs are considered 60% fixed and 40% variable with volume.
Actual
Salaries 345,000
Payroll Hours 11,000
Service Volume 75,000
Budget
Salaries 413,000
Payroll Hours 9,500
Service Volume 150,000
