Companies use variance analysis to compare financial performance changes from one month to the next, or perhaps from one quarter to another or year to year.
Variance Variance A variance has several meanings in business. In an accounting sense, a variance is the difference between an actual amount and a pre-determined standard amount or the amount budgeted. In a statistical sense, a variance is a measure of the amount of spread in a distribution.
It is computed as the average squared deviation of each number from its mean.
Finally, variance has a meaning related to land use called a zoning variance. A zoning variance is an administrative exception to land use regulations.
Variances can be favorable or unfavorable. A variance from standard cost is considered favorable if the actual cost is less than the standard or budgeted cost, and it is considered unfavorable if the actual cost is more than was budgeted. It is also possible to break down the cost variance into the factors that may have caused it to occur—such as a quantity variance, or the difference between the actual quantity and the standard quantity; and a price variance, or the difference between the actual price and the standard price.
When a variance occurs, like the cost variance in this example, top management should examine the circumstances to determine the factors that created it.
By doing so, management should be able to identify who or what was responsible for the variance and take steps to correct the problem. Alternatively, the process may have used a greater quantity of material than standard. Or, there may have been some combination of these factors.
The purchasing department is usually responsible for the price paid for materials. Therefore, if the variance was caused by a price higher than standard, responsibility for explaining the problem rests with the purchasing manager.
On the other hand, the production department is usually responsible for the amount of material used. Thus, the production department manager is responsible for explaining the problem if the process used more than the standard amount of materials.
However, the production department may have used more than the standard amount of material because its quality did not meet specifications, with the result that more waste was created.
Then the purchasing manager is responsible for explaining why the inferior materials were acquired.
On the other hand, the production manager is responsible for explaining what happened if the analysis shows that the waste was caused by inefficiencies. Thus variances—like the cost variance in the example above—trigger questions to be answered within the organization. These questions call for answers that, in turn, should lead to changes designed to correct the problem and minimize or eliminate the variances for the next reporting period.
In studying variances in expenditures, a company may find that the assumptions upon which its budgets were made were in error.
These too should be corrected so that the budget will more accurately reflects the likely outcome in the next period. A performance report may identify the existence of the problem, but it can do no more than point the direction for further investigation of what can be done to improve future results.
Other common variances in accounting include overhead rate and usage variances. The variance is one of several measures that statisticians use to characterize the dispersion among the measures in a given population.A budget is the foundation of a company's plan for how it intends to operate, control costs and make a profit.
Budget variance analysis is a . The variance analysis is often written up in report form by the finance staff with explanations of why the major variances occurred. The business owner may discuss the results with each of her managers individually, or she may gather them together for a monthly meeting and go over the results of all departments.
Dec 12, · Variance analysis looks after-the-fact at what caused a difference between plan vs. actual. Good management looks at what that difference means to the business. LivePlan provides the plan vs.
actual data that owners and managers need to do that critical variance analysis/5(18). Jun 25, · No matter how long you’ve been in operation, your business needs a plan.
A good business plan can help you secure funding for your startup, or expand your operation. Even if you aren’t looking for a capital infusion right this moment, a business plan can still be a great deal of help.4/4(25).
A business plan should be presented in a binder with a cover listing the name of the business, the name(s) of the principal(s), address, phone number, e-mail and website addresses, and the date. The easiest way of writing the executive summary is to review your business plan and take a summary sentence or two from each of the business plan sections you’ve already written.
If you compare the list above to the sections outlined in the Business Plan Outline, you’ll see that this could work very well.