Question

A budget reports is prepared on the principle of exception and thus (A) Only unfavourable variance should be shown (B) Only favourable variance should be shown (C) Both (a) & (b) (D) None of these

Answer 1

Answer:

In addition, a properly prepared budget allows management to follow the management-by-exception principle by devoting attention to results that deviate significantly from planned levels. For all these reasons, a budget must clearly reflect the expected results.

Answer 2

The correct answer is option (c) Both favourable & unfavourable variances should be shown.

Explanation:

• A budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis.
• A budget report is a comparison of the actual results of a business to a preestablished budget, whereby it shows the deviations.
• A budget report is prepared on the principle of exception - practice whereby only the information that indicates a significant deviation of actual results from the budgeted or planned results is brought to the management's notice.
• As such, both favourable variances (indicating best performance segments) & unfavourable variances (indicating worst performance segments) are reported as minor variations are obvious and hence not reported.