Many companies allow managers to oversee their departments using their own methods. These companies place the responsibility on the manager to meet company goals, service her customers and manager her expenses without interference. These companies use budgets as a method for evaluating the manager’s performance. They calculate the difference between the budget amount and the actual expense and base the manager’s evaluation on this calculation. For some managers, the budget represents the only method of performance measurement.
A budget variance represents the difference between the budgeted amount and the actual amount. Many managers develop the budget numbers personally prior to the beginning of the budget year. The company expects the manager to analyze each budget amount and use reasonable amounts in the budget. The manager considers labor costs, supplies and other expenses necessary to operate his department. During the year, the company calculates a variance for each item listed on the budget.
Senior management oversees the work performed by managers throughout the company and evaluates the performance of these individuals. Budget variances provide senior management with a method of reviewing manager performance without involving themselves with the manager’s daily duties. Senior management reviews the variances and determines whether each variance falls within a reasonable range or whether the variance exceeds that range. When a variance outside of that range occurs, senior management contacts the manager for an explanation.
Several advantages exist for companies who only use budget variances to measure management performance. These include reducing the amount of time spent on performance evaluation, allowing the manager freedom within her department and holding the manager accountable. Senior management must focus its resources on strategic planning while overseeing the work of each manager in the organization. The use of budget variances to evaluate manager performance reduces the time commitment required. This also limits the time spent overlooking the manager’s work throughout the year. The manager enjoys the freedom of implementing work processes without needing additional approval. And since the manager developed the budget herself, she holds a vested interest in the variances.
Some disadvantages exist when companies use only budget variances for performance measurement. A single measurement yields less than a full picture of the manager’s performance. The manager may have increased production for the period, causing an increase in expenses. The increased expenses create a variance in the budget. Another disadvantage occurs when the manager lacks full control over the budget amounts. The manager lacks ownership or accountability for these numbers.
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