Variance analysis: Why and how
2 Pages
English
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Variance analysis: Why and how

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2 Pages
English

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Variance analysis: Why and how Measuring a set target is a basic principle. Imagine you decide to save $ 500 in a month and then when the month ended you are not checking whether you were really able to reach your goal. Silly ƚŚŽƵŐŚƚ͕ ŝƐŶ͛ƚ ŝƚ͍ KĨ ĐŽƵƌƐĞ, you would like to know and surely you will count your savings.

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Published 28 October 2016
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Language English

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Variance analysis: Why and how Measuring a set target is a basic principle. Imagine you decide to save $ 500 in a month and then when the month ended you are not checking whether you were really able to reach your goal. Silly thought, isŶ’t it? Of course, you would like to know and surely you will count your savings. The same principle applies to companies. A certain budget is set and at the end of the period, it is time to check it. In management accounting, this part is called variance analysis. Why is variance analysis so important?
The ŵaiŶ aŶd straight forǁard idea of a ǀariaŶce aŶalysis is to eǀaluate a coŵpaŶy’s perforŵaŶce. If the company aims for an EBITDA of $ 12 Mio in a year, management wants to know whether actual figures are in line with the plan. It is likely that a monthly report is generated showing how the EBITDA is developing. Deviations indicating that the $ 12 Mio could be underperformed will cause management to worry and to take action.
Additionally, there are some more advantages of a variance analysis: Identifying issues in current trading: If negative variances result for some items, this can indicate some operational issues which need to be further investigated and corrected. Identifying budgeting problems: If variances occur throughout the report, this may indicate wrong assumptions during budgeting. Identifying bad management: Variances can be a reason of bad management. For example a lack of proper sales training. Identifying criminal issues: Variance analysis can cover up internal crime like theft or overuse of expenses allowance. How should a variance analysis report be designed?
Generally, a variance analysis report should be a standardized and periodical document. Larger companies produce these reports on a monthly base using a wide variety of management accounting programs. In the end, however, the following points should normally be applied to such reports: Granularity according to audience (the board may not be interested in every little detail, the product manager, on the other hand, is very keen for an in-depth analysis) Showing planned values and actual values
Differences (variances) shown as absolute figure and percentage Year to date values and current period values should be shown Both negative but also positive variances should be commented to add insight. This can be a difficult task for a management accountant but it is essential and time should be invested to produce an insightful comment. Without it, the audience will not be able to understand the reason behind a deviation.
On top of these, I personally recommend working with colors. Highlighting important parts of a report help the receiver to focus on relevant data. Sometimes the audience could be very busy and only briefly checking the report. In this case, colors a certainly a plus. In the report example below, all the mentioned aspects are included:
Conclusion This article showed why variance analysis is an essential part of management accounting and how such reports should be designed. Management accountants should keep in mind that comments transform data to valuable insight.
About the author
Adrian Leuenberger is a chartered management accountant with many years of practical experience. He studied strategy, financial controlling and entrepreneurship in Switzerland and England. He is the owner ofhttp://www.hotspotfinance.com/, a management accounting blog.