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Application of Potential Variances

Task 2 – Identify and plan for

potential variances


Variances are the difference between the allocated budget and actual performance.

The types of potential variance include:

• sales volumes

• sale price

• material costs

• material usage

• staff costs

Create contingency approaches and plans to minimise the impact of any potential variances.

At least two potential variances must be identified together with their type and the

contingency plan suggested for each.

Answer

Task 2: Identifying and planning for potential variances

Identified potential
variance:

The type of variance:
Reason for the potential
variance:

Suggested
contingency plan:
Sales volumeSalesWhile formulating budget, sales volume could be predicted. This   prediction may vary significantly when budget is actually initiated and is   monitoredIn order to prevent this variance, it is essential that proper   marketing strategies be adopted that will help in boosting of sales volume 
Sale priceCostWhile formulating budget, sale price could be predicted. This   prediction may vary significantly when budget is actually put into actionIn order to prevent this variance, sale price of similar products or   services needs to be studied and then decision should be made
Profit volumeProfitWhile formulating budget, profit volume is roughly predicted. This   prediction may vary significantly when budget is actually put into actionIn order to tackle this variance, good quality raw materials need to   be purchased at a cost effective price. Sale price should be ideal and sale   volume should be healthy through efficient marketing of products and services
Net profitProfitWhile formulating budget, net profit is roughly calculated. This   prediction may vary significantly when budget is actually put into actionIn order to minimize this variance, cost-benefit analysis must be   carried out for project
Labour costLabourWhile formulating budget, labour cost is roughly predicted. This   prediction may vary significantly when budget is actually initiatedIn order to negate this variance, cheap skilled labour should be   arranged. According to budget requirement, labourers should be employed
Labour efficiencyLabourWhile formulating budget, labour efficiency is roughly predicted. This   prediction may vary significantly as budget progressesIn order to tackle this variance, labours should be provided periodic   rest between work. Sunday must be declared as a holiday for them to refresh   their body and mind
Material usageMaterialWhile formulating budget, material usage is roughly predicted. This prediction   may vary significantly when budget progresses
In order to tackle this variance, extra materials should be purchased   and stored. 
This will prevent from hindering of progress of budget due to scarcity   of required materials 
Material costMaterialWhile formulating budget, material cost is roughly calculated. This   calculation may prove incorrect when budget progressesIn order to mitigate this variance, proper survey needs to be carried   out regarding cost of required materials in both near and far away markets 
Staff costFixed overheadWhile formulating budget, staff cost is roughly calculated. This   calculation may vary when budget is initiatedIn order to tackle this variance, staff requirements should be decided   and pay scale of staffs should be fixed. Staffs should be appointed according   to requirement of budget
Overhead costOverheadWhile formulating budget, overhead cost is merely calculated. This   calculation may vary as budget progressesIn order to negate this variance, a separate amount of money should be   maintained. Moreover, funding sources could be arranged 


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