Budgeting Basics and Beyond

8.19. Conclusion

Variance analysis is essential for the appraisal of all aspects of the business, including manufacturing, marketing, and service. Variances should be investigated if the benefits outweigh the costs of analyzing and correcting the source of the variance. Variance analysis reports should be in dollars and percentages.

Variance analysis identifies trouble spots, highlights opportunities, encourages decision making, and fosters coordination between responsibility units.

Significant unfavorable variances must be examined to ascertain whether they are controllable or uncontrollable by nonfinancial managers because they relate solely to external factors. When controllable, immediate corrective action must be undertaken to handle the problem. The manager should provide recommendations. If a variance is favorable, an examination should be made of the reasons so that corporate policy may include the positive aspects found. Further, the responsible entity for a favorable variance should be recognized and rewarded.

Different degrees of significance of variances may be present, including:

• The variance is within tolerable and normal range and thus no remedial steps are necessary.

• The variance is intolerable and thus either performance must be improved or new standards formulated in light of the current environment.

• The decision model was inappropriate, considering the goal to be achieved, and thus a more relevant model should be developed.

Reports on operating performance should ...