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understanding variances from budget; capital vs operations

Why is understanding a variance from a budget so important?

Why is capital budgeting done separately from a company operating budget?

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Why is understanding a variance from a budget so important?

A variance is a departure from expectations. There are many variances and each tells a different story. A material price variance tells you about the purchase differing from expectations. A usage variance tells you about how well the material was handled and the waste in its use. A rate variance tells about labor rates compared to expectations. Efficiency variances tell you about the speed of completion. There are also variances from budget in the operating budgets for both variable and fixed expenses as well as variances in pricing and quantity sold.

By knowing what each variance is supposed to tell you, you can figure out which manager can explain the variance and develop likely explanations and strategies for responding. If the variances are mainly material price related, the purchasing manager would be the responsible party to interview and follow up with. If the labor rate variance was large, the production ...

Solution Summary

Your response is 547 words and explains how understanding variances helps to identify the person and the threat or opportunity underlying the variance. Examples are given. The purpose and content of the capital budget is contrasted with the purpose and contents of the operating budget. Also, the discussion indicates how the capital budget can impact the operating budget.