MANAGERIAL USEFULNESS OF VARIANCE

ANALYSIS

PRESENTED TO:
SIR ISRAR AHMED
PRESENTED BY:
UZMA NOSHI
M.COM (2)CIT (AIOU)
 WHAT IS VARIENCE

A VARIANCE IS THE DIFFERENCE BETWEEN A BUDGETED,

PLANNED, OR STANDARD COST AND THE ACTUAL AMOUNT
INCURRED/SOLD. VARIANCES CAN BE COMPUTED FOR BOTH
COSTS AND REVENUES.

What is varience analysis:

Variance analysis is an analytical tool that managers can
use to compare actual operations to budgeted estimates. In
other words, after a period is over, managers look at the
actual cost and sales figures and compare them to what
was budgeted. Some budgets will be met and some will
 PROFIT VARIENCE
 Profit varience

 Total cost varience

 Total sales varience
TYPES OF VARIANCES

Total cost variencse

Material cost Direct labour

overheads
varience varience

Quality Time or Fixed Variable

Price Rate idle time
or usage effiecency overhead overhead
varience varience varience varience varience varience
varience

Yeild or Mix or
Mix Yeild Expenditure Volume
sub usage gang
varience varience varience varience
varience varience

Efficiency Capcity Calender

varience varince varience
 Total sales varienc
 Sales volume varience

 Sales price varience

HOW COMPANIES APPLY VARIANCE
ANALYSIS?

 Most of the companies are concerned with business

planning and meeting their financial commitments.
Ultimately all want growth. Accordingly, they
analyze the variances between:
 a. Previous-year actual results and current year’s
budget, which helps them in planning and this is also
a part of the budgeting process.
 b. Existing budget (current financial year) and
current-year actuals, which helps them in meeting
their commitments. This activity is performed at
regular intervals throughout the year like at close of
every quarter and at year-end.
 c. Previous-year actual and current-year actual for
analyzing growth. This is done at year-end.
APPLICATION OF VARIANCE ANALYSIS

 a. Comparing Budget with Actual: Variance

analysis helps in managing the annual budgets by
monitoring the budgeted figures and comparing it
with the actual revenue/cost.
 b. Identifying Relationships: Relationship between
a pair of variables/elements/items could also be
identified with the help of variance analysis.
 c. Forecasting: Forecasting uses patterns of the past
data for developing a theory about the future business
performance. Variances are placed into the context
which helps analysts in identifying factors.
BENEFITS OF USING VARIANCE ANALYSIS

 Using variance analysis in the decision-making process

renders the following positive impacts:
 a. Competitive advantage: Variance analysis helps an
organization to be proactive in achieving their business
targets, helps in identifying and mitigating any potential
risks which eventually builds trust among the team
members to deliver what is planned.
 b. Identifying the changes required in the business
strategy: In some of the cases, comparing budget with
actual results may point out the requirement for re-
evaluating the target customer base or product line of the
company. Several assumptions go into developing a
budget. In case those assumptions are blowing up the
budget, it could be because the budget-related projections
are wrong for a variety of reasons. It could also be due to
changes in the economy or delays in getting the
products/services sent to end customers.
 c. Identifying any managerial concerns : At times, variance
analysis could also provide insight as to how well an organization
is being managed. For instance in the case of purchasing, the
inability to negotiate volume discounts or securing the competitive
bids could indicate managerial problems within the purchasing
department. Moreover, weak sales could also be an indication that
the salespersons are not trained properly or they lack motivation.
By addressing such issues, the variances could disappear as the
organization gets on track.
 d. Managing risk: With the help of variance analysis, the finance
heads gather insights which they require to understand the
reasons for controllable and uncontrollable variances. Once they’re
aware of such variance, they’re in a position to implement policies
to mitigate such risks arising from such variances.
 e. Creating shareholder value: When an organization brings in
proper internal controls, a cross-functional environment, efficient
internal audit process, and the culture of meeting commitments, it
increases the chances that the variances would be favorable which
means that the business commitments would be met or even
exceed the expectations.