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Budget Sets Costs and Expenses

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For instance, the marketing department aims to generate sales of one million dollars for the coming quarter. The figure is considered the budgeted sales. Hence, if the number of sales realized for that given quarter is only eight hundred thousand dollars, the difference of two hundred thousand dollars is an unfavorable sales variance. However, if sales reach one million one hundred thousand dollars for the projected three-month period, there is a favorable variance of one hundred thousand dollars. There are different types of variances and the more commonly used to pertain to the costs of labor and materials.

Both are pegged according to quantity and unit cost. To illustrate, Company X is in the construction business. For the window installation process of a certain building, it has budgeted one hundred glass panes at ten dollars each for materials. It will thus be a budget of one thousand dollars (100 x 10) for the cost of materials. Labor cost is pegged at one dollar per hour and it is estimated that a total of five hundred hours is needed to finish installing the windows.

That will be a total budgeted cost for labor in the sum of five hundred dollars (1 x 500). Total budgeted cost for both materials and labor needed to complete installing the windows is one thousand five hundred (1,000 + 500) dollars. In the illustration for Company X, if it actually used one hundred glass panes which were purchased at the budgeted amount of ten dollars per pane, the total actual cost for materials is one thousand dollars. This shows that costs for materials were incurred according to the forecast amount of one thousand dollars.

There is no difference between projected and actual costs for materials. Otherwise stated, there is no variance as materials cost were exactly the same as projected. If Company X was able to use one hundred ten glass panes instead which were bought at ten dollars apiece, the total actual cost for materials is one thousand one hundred dollars or one hundred dollars more than what was budgeted.

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