DescriptionCompanies try to predict their sales and revenues to make sure their actions lead to good business decisions. After a sales period, companies usually perform a variance analysis. This determines the accuracy of their predictions by comparing predicted costs to actual costs. As a result, companies identify their cost drivers and make the necessary changes to their budget. Multiple cost drivers can be responsible for a single variance. Companies use a flexible budget to figure out where the budget needs to change. Flexible budgets are a way for companies to adjust their cost drivers to increase profitability.
At A Glance
- Variance analysis tells an organization how accurate its managers' predictions were.
- Variance analysis looks at the difference between actual costs and predicted (or budgeted) costs.
- Cost drivers can be adjusted based on the variance analysis.
- Flexible budgeting can make organizations' budgets dynamic and up-to-date.
- Flexible budgeting requires periodic adjustments to the budget.
- There are common variances that many manufacturers use.
- Variances in manufacturing can be calculated to give insight into the company's efficiency.
- Most companies have multiple cost drivers that they will adjust under a flexible budget.