Application: 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.

Variance Analysis

Actual Service Volume: / 75,000
Budget ServiceVolume: / 150,000
VariableExpenseFactor: / 40.0%
VolumeChangePercent: / -50.0%
VolumeAdjustment Factor: / -20.0%
Description / Actual / Budget / Variance (Unfavorable)
Salaries / $345,000 / $413,000 / $68,000
VolumeAdjustment / (82,600) ( / ($82,600)
VolumeAdjustedSalaries / $345,000 / $330,400 / ($14,600)
PaidHours / 11,000 / 9,500 / (1,500)
VolumeAdjustment / (1,900) / (1,900)
VolumeAdjustedHours / $11,000 / $7,600 / (3,400)
Labor Rate / $31.36 / $43.47 / $12.11
Labor RateVariance: / $92,036
EfficiencyVariance: / ($106,636)
Total Variance: / ($14,600)

For this Assignment, based on the information from the variance analysis provided, 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.

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 the analysis provided and consider how calculations 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.

Submit the 3-page paper to the AssignementTurnitin - Week 8 link in the Week 9 Assignment area.