planning and operational variance

We use variances to see whether or not the relevant manager has done his/her job well or badly.

So if, for example, we budgeted on material to cost $4 per kg but we actually spent $6 per kg then it seems as though the purchasing manager has been performing badly by paying too much.

However, if we find out that in fact prices of the material increased and it turned out that everyone was charging $7 for material then the purchasing manager actually did a good job because he/she saved money. In the same way, if it turns out that the budget was prepared wrongly and the price was never going to be $4 and should have been budgeted at $7, then again the purchasing manager actually did well by only paying $6.

The operating variance is measuring whether or not the manager performed well. The rest of the difference from the original budget is the planning variance because the original budget turned out not to be realistic.