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Variance Analysis is utilized to support the management during the initial stages. It is the procedure of investigating each variance between the actual and budgeted costs to determine the reasons as to why the planned amount was not met, in more detailed explanation (Ventureline, 2012). There are several influences that contribute to the variance report and one is the department’s assumptions, second is the possible risk for this assumption, and third is the actual expense used for the budget. Let’s say the CEO or Director announces the monthly budget that the department needs to meet. Once the department receives the monthly budget outcomes, the budget for supplies was not properly utilized; therefore the salary is higher than the premeditated budget. Once a monthly budget is received for a given month, the managers have to plan on how to use the given budget wisely. It’s true that the employees need some office materials or equipment to get the job done and there are certain areas where the budget needs to be dispensed accordingly.
An example to this is the healthcare industry, specifically within the supplies department where the demand for medical supplies is high and needs to be available whenever needed. For the department to run efficiently they need a reliable technology that could help them streamline their process like computers, handheld scanners for inventory, and supply carts, and these are supposed to be available even before opening the department or even before the hospital started business. The carts have a long lifespan and could last for years; therefore sometimes planning for the budget to be used for supplies per month does not need to be met since the supplies needed by the staff are already supplied. Under budgeting for this specific department is safe because it can help the department save some money in case a supply cart breaks and the part is non-replaceable, they have enough to purchase a new cart instead (Heisinger & Hoyle, 2012). Another aspect that needs to be considered while developing the variance report is the employees’ salaries.
Given that the employees are being paid with a certain amount or rate every pay period makes it easy for the department manager to predict how much budget is needed to be able to pay all the staff. But then, there could be some risks for this kind of assumption like annual pay raises depending on the employees annual performance report, hiring new employees to assist the department (especially if the department is continuously growing). The department manager could either exceed or go under the monthly budget for the department, depending on the situation (Heisinger & Hoyle, 2012). During the preparation for the variance report to the CEO or Director, the manager should include the reasons as to why the budget is either over or under the given budget for the department for the month, especially when employees receive certain incentives in regards to their work performance or length of tenure. Normally, employee pay raises goes up from 2.9% to 3% for the year 2015 (Strauss, 2014).
The department manager needs to include the reason or reasons as to why the variance amount was high for the month. In cases where the manager needs to hire a new employee to assist the growing department, they would need to get approval from the CEO or Director to determine if hiring a new employee is within their budget, and once the proposal for hiring is approved, the manager could start with the hiring process and the new employee will be paid accordingly to what the budget allows the department to pay for the new hire. This is the reason why most of the time during employment applications, the company or department would ask the applicant what their minimum rate or pay would be so as to maybe not pay them higher than the budget or lower than what their qualifications should get them paid for. In cases like this, the manager could always ask for the Human Resource’s assistance to make sure that the new hire and the company or department both agrees on the approved budget or pay.
In preparing the variance report for the CEO or Director regarding the hiring example, the manager would need to explain why the salary offered to the new hire is high and the budget for the supplies is low. As stated earlier, the budget for supplies is not always going to be met because of the supplies’ lifespan; therefore, personally I would prefer the supplies budget be lowered and the pay for employees increases. It makes it balanced. Development of variance report is significantly important for each and every business to keep the budget under control. It also projects where the budget is being used, or is it being used wisely or not. This report influence the budget expense, the current budget used, the difference becomes the variance amount.
There are risks involving the actual expense being used by the department like new hire employees, or the annual pay increase for employees, but depending on the situation, the department budget can either be met or can be under the budget specified. In preparing the variance report, the manager should be able to compare the previous months to be able to determine the difference of where the actual budget was used in case it was higher than the allotted budget. All of these aspects are need to be in place and analyzed in order to find out the reason why the employee salary is higher than what the budget is allotted to the department.
Heisinger, K., & Hoyle, J.B. (2012). How do managers evaluate performance using cost variance analysis?. Accounting For Managers, 1.0. Retrieved from http://2012books.lardbucket.org/books/accounting-for-managers/s14-how-do- managers-evaluate-perfo.html
Straus, G. (2014). 2015 pay raises expected to be 3% next year. USA Today. Retrieved from
Ventureline (n.d.). Variance analysis definition. Retrieved from https://www.ventureline.com/accounting-glossary/V/variance-analysis- definition/