Variance Analysis: Know the story, give them the précis

Kaplan have a wealth of online materials that I find really useful for cribbing up on the management half of management accounting  (Deloitte do a newsletter about developments in pertinent reporting standards for the UK, so that’s my main tool on the accounting half).

One such page is HERE – a “cheat sheet” of the traditional types of variance & how they’re calculated. Admittedly, in the modern business environment, some of these techniques are a little dated. But there are analogues – particularly the concept of sales mix remains extremely relevant.

So, let’s imagine we’ve got our budget, or our industry/competitor benchmark, or our latest forecast. And then we have our actual figures. The variance between the two will likely have a number of causes (higher than 1…) and in theory, you can break that total down into these constituent parts to get from A to B. In fact, I produced such analyses under exam conditions to get my qualification (CIMA – still only exam-qual but will get my CV submitted real soon). And that’s nice. But, in my experience, managers don’t really want to see all that. They want to see the KEY driver of variance and understand that really well.

So, this is where you come in, as the analysis preparer. You need to break it downand see the detail first, of course. Then you need to step back, group together interrelated items (eg adverse overtime spend is probably related to the favourable unfilled vacancies saving…) and present them in order of “impact magnitude” from greatest to least. I aim to explain at least 75% of my EBITA variance & about 90% of my revenue variance (but I don’t work in the retail sector, so make of that what you will). My other key consideration: is this merely a timing issue? Or is that variance “baked in” for the rest of the reporting period? Finally, who’s to thank/blame?

(Note: The nature of the variance and how you need to describe it is hugely affected by what you’re comparing – especially between internally and externally generated figures.)

Variance Analysis for management is about knowing the full story, and giving them the précis.


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