Arapahoe County: Variance Analysis Memorandum

In essence, budget variances occur because spending did not take place as had been planned. Therefore, in basic terms, variance could be representative of under-spending or overspending. Both under-spending and overspending, as shall be highlighted in this text, could have diverse implications. In that regard, therefore, there is need to highlight the factors that caused under-forecasting or over-forecasting of actual figures. This is important so that future variances can be reduced by taking corrective action on the basis of information derived from the present variance analysis. This text looks into the various spending categories, as presented, and highlights the various concerns relating to overspending and overspending. Further, the text discusses the overall picture painted across all spending categories, with an aim of analyzing the department’s effectiveness as a whole in budget forecasting.
An analysis of the adopted budget vis-à-vis the actual expenditures of Arapahoe County presents several instances of under-spending, in which case some budgeted funds remain unspent. While this could be a red flag in some instances, it is largely understandable in others. The Arapahoe County’s adopted budget is, in essence, a plan. In that regard, therefore, it may not match the actual expenditures and may be subject to variances. However, the county ought to have in place and embrace best practices in relation to the budgeting process where there are robust oversight and monitoring processes.
It is important to note that in some instances, managers may have deliberately failed to report instances when there were reasonable expectations that that actual expenditures would come under budgeted expenditures. In this case, there may have been concerns that some unanticipated uses could crop up during the fiscal year. Failure to report or factor in the relevant figures could have been founded on the fact that anticipated savings could be used as a basis to slash present or future budgets. This particular concern manifests itself in supplies where we have a 26.8% positive variance for the fiscal year 2013 and a subsequent 41.4% positive variance for the year 2014. In essence, there is a significant gap in this case, which could have come about as a consequence of cost savings in the fiscal year 2013 that may not have been reported. It should also be noted that in instances where unforeseen costs come about in the course of the fiscal year, some managers may rationalize exceeding expenditure budgets. This could have taken place in the fiscal year 2015 going into 2016 where a negative variance in 2015 could be used to explain the 37.4% positive variance in the year 2016. The managers in the category may have found it hard to absorb the costs anticipated for the year 2016.
It should be noted that in relation to salaries and wages, forecasting could be clouded by numerous vacant positions that are budgeted for, and in which case the offsetting attrition figures are significant. The department does not appear to have this particular problem – especially given the largely minimal variances from year to year – except for the year 2016, in which case the negative variance in the year 2015 may have motivated padding. Budget padding, in the words of Shim, Siegel, and Shim (2011), has got to do with the “underestimating revenue or overestimating costs” (311). The motivation in this case is often to ensure that the budget is beaten; and in this particular case, the course of action could have been to overestimate salaries and wages so as to reduce chances of a similar fate as of 2015. It is, however, important to note that other ‘outlier’ occurrences ought to be factored in to explain the positive variances from time to time with regard to salaries and wages. These include, but they are not limited to, resignations in which case replacements are not hired immediately, retrenchments, and reduced costs for overtime pay. Supplies did report huge variances, as was the case in capital outlay and central services.
Given the imperfect nature of budgeting, small variances are permissible. However, it should be noted that large variances are often an indicator of deeper issues relating to not only the budgeting, but also the expenditure process. Towards this end, variances falling below 10 percent may not be a significant issue of concern in Arapahoe County. Nevertheless, they ought to be examined so as to better the budgeting process for future purposes. The positive variances in 2013 (26.8%) and 2014 (41.4%) for supplies could be indicative of cost saving measures that could have been undertaken, which include reducing orders for certain items, thus effectively bringing down operating expenses. However, they could also be as a result of serious inefficiencies in which case the department underutilizes resources at its disposal. However, given the significant positive variance in 2016 (37.4%), following a negative variance of -18.4% in 2015, it is likely that the county may have overshot its estimates following the said shortfall in the previous year. However, this is one item that ought to be queried further given the significant variance percentages.
According to Snyder (2006), “the budget can be a valuable tool for diagnosing fraud” or misappropriation (119). This is particularly the case in instances where the actual expenditures end up being significantly higher than those budgeted for. Overspending is also frowned upon because in such instances, obligations are incurred that have to be paid for later. It is on this basis that the Anti-Deficiency Act is founded – essentially making it a potential criminal offense for departments to overspend at the federal level. In Arapahoe County, negative variance is not largely a concern – except in two instances involving capital outlay. There are also two other mild instances in which case we have negative variance percentages. While the -14.4% negative variance in 2013 for services and other could mean that some service contracts could have ended, the -18% negative variance for supplies in 2015 could have come about as a consequence of the carrying over of supplies scheduled in 2014. If the negative variance were to follow from another negative variance in the previous year, this would necessitate a deeper analysis of the actual factors underlying the variance. There could have been various reasons for the exceeding salaries and wages in 2015, such as costs for overtime pay being higher than the expected costs. It is also important to note that for the said year, emerging positions may have had to be filled so as to handle increasing workloads. Negative variances in supplies, as Snyder (2006) points out, could result from the payment of phantom invoices or overpayment for items actually delivered.
The single digit negative variance in the year 2015 for services and other is not considered an issue of concern for reasons highlighted elsewhere in this text. When it comes to capital outlay, the County experiences two massive variances in 2014 and 2016, with the later year registering a negative variance of -739% and the former having a variance of -191% . In essence, capital outlays include all the funds or resources spent on the acquisition of a fixed asset or enhancement of its utility so as to make it more efficient or further extend its useful life. For this reason, the negative variance is not really a red flag as it could have resulted from the purchase of fixed assets such as land, motor vehicles, generators, buildings, etc. It should however be noted that this also ought to be investigated further (especially the 2016 negative variance) so as to authenticate the urgency of the outlay as well as its unpredictability.
Overall, one comes to the conclusion that Arapahoe County has issues regarding the execution of its budget in some individual categories such as supplies and central services. These variances variances could raise concerns regarding the efficiency of the County’s budgetary process. Looking at the three year moving averages, a clear trend is discernible. With an exception of capital outlay which has been explained elsewhere in this text, the moving averages tell us that that the budget is in essence moving away from the actual. This effectively means that deviations are to be expected going forward. In the final analysis, therefore, there is need for corrective measures to be taken to remedy this particular concern.
According to Shim, Siegel, and Shim (2011), In addition to being coordinated, the budget also ought to be “integrated, organized, systematic, clear, and comprehensive to accomplish results” (118). The authors compare poor budgeting habits to the phenomenon of ‘garbage in, garbage out,’ whereby inaccurate forecasts lead to inaccurate projections, which in turn trigger poor decision making. In the case of Arapahoe County, inefficiencies in the budget making process could get in the way of effective and timely service delivery. It is important that the department adheres to its adopted budget. It is also good practice to prepare forecast reports clearly indicating the reason(s) as to why the department forecasts expenditures exceeding its adopted budget. Such forecasts should clearly highlight the reasons as to why the variances cannot be absorbed through the management of other costs.



















References
Shim, J.K., Siegel, J.G. & Shim, A.I. (2011). Budgeting Basics and Beyond. Hoboken, NJ: John Wiley and Sons.
Snyder, H. (2006). Small Change, Big Problems: Detecting and Preventing Financial Misconduct in Your Library. New York, NY: American Library Association